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Borrowing to Build Your Own Home

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Borrowing to Build Your Own Home
By Lisa Provost, New York Times

Construction financing isn’t the type of loan one goes shopping for online; it is more likely to be found up the street. “The places that are offering construction financing are typically the credit unions and the regional banks,” said John Walsh, the president of Total Mortgage Services, a Milford, Conn., lender.

Local banks are more comfortable making home construction loans because they know the local market. But qualifying is more complicated than for a conventional mortgage. Borrowers have to do a lot more legwork ahead of time because, in addition to proving that they can afford the cost of the house, they must show that they have a viable project.

“People want to make sure they know what they need to do early in the process,” said Penn Johnson, the president of the Stamford Mortgage Company, a broker. “You can’t apply until after you have building plans, a construction contract and a cost estimate.”

The cost of the land may be figured into the construction loan amount, if the borrower doesn’t already own the lot.

“People either pay cash for the land, or they contract to pay cash for the land when the project’s completed, or they pay it out of the construction loan,” said Debi Orr, an agent with Keller Williams Realty in Ridgefield, Conn. But if they’re not paying at the outset, “they’re going to have to have a pretty solid down payment to qualify.”

The down payment is figured as a percentage of the total cost of the project (land and construction costs). In general, the loan-to-value restrictions are “pretty onerous,” requiring 20 to 30 percent down, said Mark Yecies, an owner of SunQuest Funding in Cranford, N.J.

Some lenders offer construction financing as a separate, short-term loan — usually no longer than a year. The borrower refinances into a permanent mortgage after the house is completed.

Increasingly, lenders are combining the two into a single 30-year loan, with a single closing, called construction-to-permanent financing. The streamlined loan process cuts down on closing costs, but some borrowers may prefer not to be locked in and to retain instead the flexibility to shop for mortgages.

That is because interest rates on construction-to-permanent loans are a little higher than on conventional mortgages.

“You might be paying an extra quarter to a half a percent above Fannie Mae” on such a loan, Mr. Johnson said, comparing that with “a 30-year fixed in the low 4 percent, and a 5-to-1 adjustable-rate mortgage at 3 percent.”

As funds are disbursed during construction, lenders charge the borrower only for interest on the amount owed. Yet the steep down-payment requirement for construction loans is limiting.

And those who hope just to buy land for a future home will find financing no easier. Lending for land alone, with no clear timeline for construction, is difficult to find, mortgage brokers say. Banks deem these loans to be very risky, “because there’s nothing really tying anybody to a piece of raw land,” said Mr. Walsh of Total Mortgage.

“If the borrower loses a job or runs into financial trouble,” he said, “the land will probably be one of the first things they stop paying on. Banks may compensate for that by asking for 50 percent down.”

In Scarsdale, New Rochelle and Mamaroneck, N.Y., builders are paying all cash for building lots, said Iris Kalt, an agent with Prudential Centennial Realty. Likewise, in Litchfield County, Conn., “the people that are buying the expensive pieces of land are usually buying them straight out,” said Kathleen Harrison, a principal of Fazzone & Harrison Realty in Sherman

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Wells Fargo Sends Refunds to Some FHA Mortgage Customers

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Wells Fargo Sends Refunds to Some FHA Mortgage Customers

The bank says the customers paid unnecessary fees for their loans. If customers cash the checks, they can’t later sue Wells Fargo. Your take? There’s a catch: If you cash the unsolicited check, you can’t sue later.

Thousands of Wells Fargo & Co. home loan customers recently received a surprise in the mail: refund checks from the big bank, along with letters saying they had paid unnecessary fees for their mortgages.

The unsolicited offers of thousands of dollars arrived with a catch — if the borrowers cash the checks, they can’t later sue the No. 1 U.S. home lender. The San Francisco bank said in the letters that borrowers were put into more expensive loans when they could have qualified for cheaper ones.

Analysts said the letters sent to potentially 10,000 Wells Fargo borrowers were a way for the bank to sidestep further litigation over “steering” customers into unfavorable loans — allegations that the government has made about certain Wells Fargo operations in the past.

It’s one in a long series of legal troubles for major mortgage lenders, the five largest of which agreed in February to a $25-billion settlement of accusations that they “robo-signed” foreclosure affidavits and otherwise abused distressed borrowers. Mortgage investors have barraged them with lawsuits over defaulted loans, and the government also recently filed separate complaints against banks including Wells Fargo, JPMorgan Chase & Co. and Bank of America Corp.

“It sounds like they either found some problems themselves or the regulators discovered them and told them to get things fixed,” said Paul J. Miller, an analyst who follows Wells Fargo for Friedman, Billings, Ramsey & Co.

Wells Fargo’s mailed refunds involve government-backed FHA mortgages made from 2009 through 2011. These loans are often made to borrowers with shaky credit or those who can’t come up with the 20% down payments required for conventional loans.

Though they require as little as 3.5% down, the FHA loans are also more expensive because they require borrowers to pay steep insurance payments to protect against a default. However, in this case, the borrowers actually had the down payments or home equity needed to get a conventional loan, bank officials said.

Wells Fargo spokeswoman Vickee Adams said the problematic FHA loans turned up as the bank reviewed operations at two mortgage channels it has closed down: a subprime lending arm, Wells Fargo Financial, and a wholesale arm that made loans through independent brokers.

The bank previously paid a combined $260 million to settle Federal Reserve and Justice Department allegations that its lending, pay and sales quota practices in the home lending business caused borrowers to be placed into higher-cost mortgages. It didn’t admit wrongdoing.

The loans were written as Wells Fargo surged to become the No. 1 originator of loans insured by the FHA. A bank mortgage spokesman said 528,000 Wells borrowers received FHA loans during the years 2009 through 2011, of which fewer than 2%, or 10,560, were offered refunds. He wouldn’t say exactly how many refunds the bank has offered.

Mortgage professionals say banks often make more money packaging FHA loans into mortgage bonds than they do on traditional loans because of the government guarantee. And at the time in question, loan officers often made higher commissions on FHA loans.

The refunds came to light when the Los Angeles Times obtained a copy of one of the letters. The bank never announced them publicly.

Pomona resident Eric Murrillo-Angelo received a $6,676.89 check last month in a letter saying he “may have qualified for a conventional conforming mortgage” instead of the FHA loan he got in March 2010.

“I was really excited,” he said, “although maybe a little leery at first.”

Wells Fargo said a traditional loan would have had about the same interest rate as the FHA loan, but Murrillo-Angelo would not have been charged insurance premiums and higher appraisal and processing fees.

The refund included $4,847.50 for an upfront premium, $1,154.20 in annual premiums and $355 in increased closing costs, plus interest.

“You should understand that by cashing the enclosed check, you agree to release Wells Fargo … from any and all claims relating to Wells Fargo’s origination of a more expensive mortgage loan than the loan for which you may have qualified,” a bold-faced paragraph read.

After thinking the offer over for about a week, Murillo-Angelo cashed the check.

Loan officers were able to earn a commission of about 2.5% of the loan amount for FHA-backed mortgages in 2009, 2010 and part of 2011, said Fred Arnold, past president of the California Assn. of Mortgage Professionals. That compares with 1.75% commissions for conventional loans, he said.

For example, a $350,000 FHA mortgage would yield an $8,750 commission compared with $6,125 for a conventional loan.

“That meant that some unethical loan officers could potentially steer borrowers to the wrong loan,” said Arnold, who noted that regulatory reforms that took effect in 2011 make it impossible to pay a loan officer more for originating one type of loan rather than another.

A Wells Fargo spokeswoman declined to comment directly about the firm’s compensation practices. She instead provided a general statement of the bank’s policies: “We work hard to offer the appropriate loan options so that every borrower receives the appropriate loan based on his or her credit characteristics and personal circumstances and our compensation reflects that commitment,” the statement said.

Meanwhile, the bank — along with others on Wall Street — packaged its loans into mortgage-backed securities for sale to investors. Loans that met certain standards received a guarantee from government-supported housing agencies Fannie Mae and Freddie Mac.

FHA loans, however, received a higher premium when packaged into bonds. They receive a guarantee by the Government National Mortgage Assn., the federal agency known as Ginnie Mae. These securities are a notch safer for investors than Fannie or Freddie bonds, and that made them more appealing for big institutional investors like sovereign wealth funds or mutual funds.

Although the federal government has not pursued criminal prosecutions of bankers at the heart of the mortgage operations that collapsed in 2007, it has stepped up civil lawsuits against the largest originators and securitizers of home loans during the boom.

This month’s federal suit against Wells Fargo was filed by the U.S. attorney’s office in Manhattan, which has brought six mortgage-fraud lawsuits against big banks in the last 18 months. The latest, filed Wednesday, seeks more than $1 billion from Bank of America for allegedly flawed loans that its Countrywide Financial Corp. unit sold to Fannie and Freddie.

By E. Scott Reckard, Los Angeles Times, October 26, 2012, 6:09 p.m.

After Housing Crash People Want New Styles of Houses

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After Housing Crash People Want New Styles of Houses
By Hudson Sangree

As the real estate market starts to recover from its epic crash, home builders, especially those in hard-hit California, are betting that many buyers will want new houses that are different from the big suburban tract homes that proliferated during the boom.

They’re building houses intended to use no more electricity than they produce, houses with separate quarters for aging parents, and houses that are more compact and closer to jobs, shopping and restaurants.

These models target first-time buyers, growing families and downsizing baby boomers — all expected to be among the next wave of homebuyers.
“Coming out of this downturn, people don’t want more of the same,” said Gordon Jones, Northern California president of home building giant Lennar Corp. “They’re saying, ‘We’re not going to make the same mistake again.’ ”

For Miami-based Lennar, that means multi-generational housing. The company’s NextGen model has an attached apartment — with kitchen, laundry, garage and outdoor courtyard — for older parents, adult children who need to move back home, or extended-stay guests.

Recent buyer Ryan Wallace said he and his wife opted for a NextGen house in El Dorado Hills, Calif., so his parents, who live in British Columbia, could come for longer visits to see their children and grandchildren in Northern California.

“It allows them to have their own space and space for us as well,” Wallace said.

Their move to more than doubled their living area to accommodate a growing family.

Kari Chicoine and her husband are heading in the opposite direction — downsizing after their children left for college. They’re moving from a 3,300-square-foot house in El Dorado Hills, Calif., on 1.3 acres to a roughly 2,000-square-foot home in Folsom with a small courtyard.

Their future house is part of the fastest-selling new home community in the region with 21 sales in 11 weeks, according to a recent report by the North State Building Industry Association.

The appeal of the project is that the airy, modern homes — with combined kitchen, dining and living areas — use space efficiently and require little maintenance, said Chicoine.

The couple plans to have a fireplace and fountain in the courtyard, she said.

“With the upkeep of 1.3 acres and cleaning, we never had time to do everything we wanted to do,” Chicoine said. In their future home, with no lawn to mow and fewer rooms, “We can put our effort into making it our little personal Shangri-La and have time to travel.”

The other important factors, she said, is that the development is adjacent to a system of bike trails that traverse the area, and it sits across the street from a large shopping center with dozens of stores and restaurants.

Kevin Carson, president of The New Home Co., said the developer polled focus groups and found that lowering utility bills through energy efficiency was a prime goal for homeowners in coming years. So were features such as more windows, downstairs bedrooms and proximity to jobs and shopping.

The New Home Co., a California startup that opened in 2010, is focused on meeting those needs, he said.

“Home building is a dated industry. It really hasn’t kept up with the times,” he said. “You can’t just keep building houses and expect to have neighborhoods.”

People will also opt for smaller homes in the future, he predicted. “The economic downturn changed the mentality. People are not biting off more home than they can afford,” he said.

Also on the horizon: urban infill projects that take energy efficiency to a new level.

In downtown Sacramento, Calif., developers are putting the finishing touches on a home that they say will be a net-zero-electricity house — meaning it uses no more electricity than it produces with roof-mounted solar panels.

It’s intended as a model for a larger project to be built on an industrial site on the edge of an older, leafy neighborhood.

The first phase will include about 200 homes — from studio apartments to stand-alone houses, said project manager Kevin Smith.

Super-insulating walls, energy-saving appliances and LED lighting are meant to give the development “green” cache. Recycled glass counters, high-tech wiring and highly efficient use of small spaces will add to the appeal, he said.

“It’s an infill product,” said Smith, “for smaller households of empty nesters and young urbanites.”

Pacific Beach/Mission Beach Showcase of Homes

 

Possible End of Mortgage Tax Deduction Worries Homeowners

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Possible End of Mortgage Tax Deduction Worries Homeowners
By Jack Katzanek

Tax reform has been a frequent campaign issue this year, with tax cuts enacted under former President George W. Bush scheduled to expire at the end of this year.

Among the many changes discussed is one beloved by homeowners across the country — the mortgage interest deduction.

If homeowners were no longer allowed to deduct the interest they paid on a mortgage — the only significant deduction for many — it might convince thousands that their best move is to walk away from their homes, experts say. It could also curtail discretionary spending and hurt the retail sector of the economy.

No one knows how large a role tax deductions on mortgage interest will play in the Washington debate as Congress tries to deal with spending and taxes. Experts predict it would be unlikely that any new policy would wipe out the deduction entirely in one year. The more likely scenario would be a phased-in program that starts with expensive houses.

According to a recent Pew Research Center study, the best definition of middle income is about $68,000 for a family of four. Most at that level might contribute something to their church or write a modest check to the Red Cross but are not likely to accumulate enough charitable contributions to make a big difference at tax time.

“I don’t know why they took away the other deductions, like the car notes and the credit cards,” Ronald Newton, a 72-year-old retired shipyard foreman in Menifee, Calif., said, referring to tax code revisions made in the mid-1980s. “About the only thing I have left is my mortgage.”

According to the congressional Joint Committee on Taxation, an estimated 40 million homeowners take the mortgage interest deduction every year, and the average savings is about $600. The mortgage deduction shrinks the federal government’s coffers by $82 billion a year.

Richard Green, director of the Lusk Center for Real Estate at the University of Southern California, testified last year before the U.S. Senate Banking Committee that the deduction, which has been around for almost 100 years, is outdated and does not encourage homeownership.

What it does is encourage debt and spur consumers to purchase bigger houses than they would otherwise. Green told senators a tax credit for buyers would go further in getting first-time buyers into homes.

Research economist John Husing said that many people are still making regular payments on a house purchased for well more than it is worth now and have little cash left over after writing that check.

“If you take away the mortgage interest deduction you’d take away part of their income, and we’re not talking about very wealthy people,” Husing said.
Taking a deduction for mortgage interest is considered an important part of many taxpayers’ financial plan, said Jamil Dada, vice president for investments at Provident Financial Holdings in Riverside, Calif. Frequently he advises clients not to pay down extra mortgage debt and use excess cash to take care of other payments.

The reason, Dada said, is that credit cards and other debt are not tax-deductible.

“It’s more beneficial to have cash flow,” Dada said.

Dada, a ranking official of the National Association of Workforce Boards, said it is unlikely the deduction would be eliminated outright because hitting middle-class taxpayers that hard would be politically dangerous.

Green said his guess is that Congress would look at mortgages worth $1 million first and possibly drop that level down over a period of years.
“It’s one thing to look at an ideal policy, and another to get there,” Green said.

Santa Monica CA Showcase of Homes

 

U.S. Home Prices Make Biggest Jump in 6 Years

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U.S. Home Prices Make Biggest Jump in 6 Years
By Tiffany Hsu

September 4, 2012, 8:19 a.m.

Nationwide home prices shot up 3.8% in July, making their largest year-over-year leap since 2006, according to real estate data provider CoreLogic.

The gain marks the fifth straight rise in the gauge, part of a positive swing following a year and a half of slumps. The last time prices rose so much was in August 2006, when they jumped 4.1%.

Prices in California bounded up 4.4%. Without distressed sales – including foreclosures and short sales – national prices were up 4.3% compared with last July.

The report, coming as a glut of house-hunters clamor after a shrinking inventory, suggests that the real estate market is “clearly seeing the light at the end of a very long tunnel,” said CoreLogic Chief Executive Anand Nallathambi in a statement.

Compared with June, prices got a 1.3% boost in July, according to Santa Ana-based CoreLogic. The company forecasts at least an additional 0.6% monthly improvement in August, or what would be a 4.6% increase compared with 2011.

Arizona led the country in price appreciation with a 16.6% surge, followed by Idaho, Utah, South Dakota and Colorado. Delaware’s 4.8% plunge was the deepest drop-off in prices, with Alabama, Rhode Island, Connecticut and Illinois also suffering major slips.

Housing, though seemingly in a recovery, is still shaky, according to other data. Consumer confidence is up, helping to push pending home sales to a two-year high, but the job market and the overall economy continue to lag.

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Personal Finance: Is a Mortgage Refinance Right for You?

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Personal Finance: Is a mortgage refinance right for you?

By Claudia Buck Published Sunday, Aug. 26, 2012

They’re knocking on the lender’s door. As mortgage rates have tumbled to all-time lows, demand for refinancing has fired up homeowners nationwide.
And it’s not just those drowning in underwater mortgages. With rates for 30-year mortgages hovering below 4 percent since last October, all kinds of homeowners are trying to get their monthly mortgages reduced, say lenders and mortgage experts.

“It’s huge. It’s buried our staff and every other lender in town,” said O.J. Vallejo, mortgage consultant with First Priority Financial in Sacramento, who said his three-person staff has been working six days a week the last four months.

Nationally, refinance volume “has been running at a three-year high in recent weeks, as mortgage rates remained extremely low,” Mike Fratantoni, vice president of research for the Washington, D.C.-based National Mortgage Bankers Association, said in an email. “With refinances, the No. 1 driver is interest rates.

Along with months of record-breaking low interest rates, other factors are driving the refinancing boom: a competitive lending market and changes in some federal refinancing programs for struggling homeowners.

It’s prompted many established homeowners with old-school, high-interest mortgages to decide it’s time to refi.

Neil and Louise Mueller, longtime Land Park residents, were encouraged by their financial planner to look into refinancing their mortgage last spring.

“It was almost too easy,” said Louise, an American River College counselor, who said the process, including a home appraisal, took about three weeks.
The result: Their 30-year, fixed-rate mortgage dropped from 5.12 percent to 3.87 percent, which lowered their monthly payment by about $100. They also pulled out about $11,000 for savings and for a family cruise overseas with their two adult children.

Why refi?

Generally the primary reasons for refinancing a mortgage are to:

  • Lower monthly mortgage payments.
  • Eliminate the unpredictability of an adjustable-rate mortgage by switching to a fixed rate.
  • Free up home equity cash for home improvements, college costs or other expenses.
  • Shorten the loan term, say from a 30- to a 15-year mortgage, which can save thousands in interest payments.

Saving money is usually the biggest incentive.

Calling the low rates “historic,” John Winters, a wealth adviser with Morgan Stanley Smith Barney in Sacramento, said he recently advised all his clients to consider a refi. Especially for those “finding it difficult to live with” the anemic returns on low-interest CDs and bonds, freeing up monthly income by refinancing can make sense, he said.

Should you refi?

It’s a personal calculation that varies. Generally, you look at how long you plan to be in your current home and whether the upfront costs outweigh the monthly savings.

“If you’re not going to be in your home another one or two years, you’re not going to recoup the closing costs,” said Greg McBride, senior financial analyst with Bankrate.com.

“Everybody’s situation is different,” said mortgage consultant Vallejo. “There’s no right or wrong answer. The only answer is what works for your family.”

Some couples who refinance are looking ahead to retirement.

“Paying off the mortgage is now back in vogue,” Vallejo said, especially for those in their late 40s or 50s, who want to be mortgage-free at retirement age.
That doesn’t necessarily mean they’ll lower their monthly payment by refinancing. For example, a couple with a $250,000, 30-year loan at 5.25 percent three years ago would have been paying about $1,380 a month. If they refinanced their current balance to a 20-year, 3.5 percent loan today, their payments would increase slightly, to $1,405.

“Their payment goes up $25, but they just took seven years off their mortgage,” said Vallejo. “That’s almost $116,000 in interest. That’s huge.”
On the other hand, younger homeowners with kids might choose a 30-year mortgage when they refinance because they need the lower monthly cash flow to save for college or pay off debt. Or those with adjustable mortgages due to reset to higher rates may want to lock in single-digit rates.

What you’ll pay

The mortgage rate you’ll be offered depends on numerous factors, including: your credit score, loan amount, loan-to-value ratio (how much you owe compared to the home’s appraised value), length of your loan term and type of home (rates on condos, rentals and vacation homes are typically higher.)
Lots of mortgage ads promise “no-cost” loans. According to some lenders, that’s a misnomer.

“It really means ‘no cash out of pocket,’ ” said Vallejo. “There’s no free lunch; somebody is paying for it.”

Typically, in a no-cost loan, all closing costs and pre-paid items (such as appraisal fees and credit checks) are paid by the lender and built into the interest rate.

Shop around

It pays to compare quotes from several lenders because they offer different rates and fees. Start with your current lender or sit down with a local loan originator. You can also do refinance comparisons online, using mortgage calculators at sites like Bankrate.com or those of individual banks and lenders.

If you’re a struggling homeowner, ask your lender about changes in the federal Home Affordable Refinance Program and FHA refinance programs that have made refinancing options more plentiful.

Bankrate.com’s McBride said the refinance market is particularly “compelling” in California, where home prices have bottomed out and there are lots of competitive lenders.

But don’t focus solely on interest rates, said McBride. When comparing refinance quotes, look at appraisal fees, title searches and closing costs. And be sure you’re comparing the same loan terms, not a 15- and a 30-year, for instance.

Good standing

Be sure the lender is in good standing.

Tom Pool, spokesman for the state Department of Real Estate, said state and federal licensing standards for mortgage originators are much stricter than they used to be, which “has weeded out most of the bad actors.”

Nevertheless, you can check a company’s or individual’s licensing status at the state Department of Corporations (www.corp.ca.gov) or the Department of Real Estate (www.dre.ca.gov).

Pool also recommends online searches at sites like the Better Business Bureau (necal.bbb.org) to see if the lender has been linked to bad practices or scams.

Too late?

Even though interest rates have inched upward in the last month, you’re probably not too late.

“It’s not worth losing any sleep over,” said Bankrate’s McBride. “Given the European debt crisis, (interest rates) can’t rise appreciably.”
On the other hand, the national mortgage bankers group predicts mortgage interest rates will “drift slowly higher” next year, leading to significant declines in refinance activity.

Above all, make sure a refinance is right for your situation.

“It’s a significant financial transaction,” said Edward Achtner, an Oakland-based regional sales executive for Bank of America. “If buying a home is the largest transaction a consumer embarks upon, a refinance is a close second. Do the research, evaluate the different options. Take your time and do not be pressured into making any decisions.”

Editor’s note: This story was changed Aug. 29 to correct the length of the Muellers’ mortgage.

Malibu CA Showcase of Luxury Homes

Housing on Mend but Full Recovery Is Far Off

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Housing on Mend, but Full Recovery Is Far Off

Today’s rising prices have less to do with surging demand—though hard-hit markets in Arizona, California, and Florida have seen significant investor appetite for distressed homes—than with declines in the number of properties for sale.

Inventories of “existing” homes—that is, ones that haven’t just been built—are at eight-year lows. New-home inventories are lower than at any time since the U.S. census began tracking them in 1963. In some cities, there are one-third fewer homes listed for sale than a year ago.

Here’s why prices are rising: There are more buyers chasing fewer homes, and—critically—fewer distressed homes, such as foreclosures. Low inventory is one sign that housing markets may have reached a turning point because many want to buy at the bottom but few want to sell.

There are several factors behind the low inventory. Banks have slowed their pace of foreclosures. Investors have snapped up discounted properties that they can convert into rentals. Home builders, struggling for several years to compete on price with foreclosed properties, have added little in the way of new supply.

For now, price gains are concentrated at the low end of the market, where inventory declines have been most dramatic. “The market is really drying up in these seemingly distressed markets really quickly,” said Michael Sklarz, president of research firm Collateral Analytics. “They really are scratching for properties to sell.”

Low inventory is benefiting home builders, as buyers grow frustrated by bidding wars sparked by a shortage of move-in-ready housing. “People can’t find inventory that they want, so they say, ‘I’m just going to buy the house down the block that’s brand new. I don’t have to go through the whole torture,’ ” Mr. Sklarz said.

Housing’s progress is good news for the economy. Residential investment has now contributed to U.S. economic output for the past five quarters, which hasn’t happened since 2005. In other words, housing is no longer a drag, though it is packing far less of a punch than it normally does at this point in the economic cycle. Rising prices also could help turn around consumers’ fragile psychology, an unpredictable but important factor that can fuel more sales.
than their homes are worth, and even more—about 45% of all homeowners with a mortgage, according to data firm CoreLogic Inc.—have less than 20% in equity. That means they don’t have enough money to make a large down payment and pay their real-estate agent’s commission to buy a comparable house.

Large price declines have left cities without what historically has been the most active segment of the home-buying market: families looking to trade up and retirees seeking to downsize. That leaves many markets relying on investors and first-time buyers, who are most sensitive to rising prices and mortgage rates. Ironically, prices are rising fastest in markets that have the most underwater borrowers because so few homes are for sale.

While low inventories have helped firm up prices, they could also soon lead to year-over-year declines in sales volumes because there aren’t enough homes on the market to sustain the current sales pace.

Consider Phoenix. Home prices through June were up by 17% over the past year, the best increase among the nation’s big cities. But home sales in July fell 8% from a year ago, amid a drop in supply of more than 25%, according to a report from Mike Orr of Arizona State University.

Jon Mirmelli, a local real-estate investor, said, “Buyers aren’t happy with what they see, and they’re staying on the sidelines.”

There are other reasons for caution. Banks are still stingy with credit. Many would-be buyers have too much debt to qualify for a mortgage.

A large overhang of distressed mortgages ultimately could drive more homeowners to sell or push banks to accelerate foreclosures. This “shadow inventory” looks as if it won’t be dumped on the market in a way that would trigger deep price declines, but it would probably keep a lid on any swift gains.

Jobs and wages also aren’t growing fast enough to sustain big rises in home prices. Recent gains may be less indicative of a strong recovery and instead point to how prices in some markets “overcorrected,” bringing in investors who will step back as prices firm up.

Others worry that mortgage rates, which are down by a full percentage point from one year ago, are temporarily boosting sales and that housing demand will slump once rates rise. Compared with a year ago, mortgage rates allow borrowers to take out about 12% more in debt without increasing their monthly payment.

The changing debate over housing underscores the sector’s tentative progress. Earlier this year, the question was whether housing would hit bottom this year or next. Now, it is “about how strong any recovery will be, how long it will last, and whether it will reach every neighborhood in America,” said Glenn Kelman, chief executive of Redfin, a real-estate brokerage.

An important test comes later this year. In each of the past three years, prices rose in the summer but gave up all those gains and more in the winter, when sales traditionally slow. This year could be different because the supply of homes isn’t piling up.

Absent a shock to the economy, housing is on the mend. But it will be a long time before it returns to normal.

Write to Nick Timiraos at [email protected]

Oceanside CA Luxury Homes for Sale

Shortage of California Homes Up for Sale

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Shortage of California Homes Up for Sale

By Kathleen Pender

For the first time in about five years, I got a call from a real estate agent Friday asking me if I was interested in selling my home.

Matt Hoffman of San Mateo says he has had two real estate people come by his home in the past month asking if he wanted to sell because if he did, they had buyers interested. “I said thanks but basically no,” says Hoffman.

After years of having too many homes and not enough buyers, agents in California now have the opposite problem – too many buyers and not enough homes for sale. Hence the cold calls from agents trying to unearth inventory.

The California Association of Realtors reported Monday that its statewide inventory of unsold homes index for existing, single-family detached homes fell to 3.2 months in August from 3.5 months in July and 5.2 months in August 2011. (The latter two numbers have been revised from previous reports.)

The index reflects the number of months needed to sell the supply of homes on the market at the current sales rate. A six- to seven-month supply is considered normal. When the number goes higher, inventory is plentiful and it’s considered a buyer’s market. When the number goes lower, the advantage goes to the seller.

Prices rise

Declining inventory helps explain why the statewide median price of an existing, single-family detached home rose to $343,820 in August, up 3 percent from July and up 15.5 percent from August 2011.

The inventory shortage “is all over the state,” says Leslie Appleton-Young, the association’s chief economist. But it’s especially severe in the Bay Area, where there wasn’t a bulge in construction during the housing bubble, there isn’t a lot of developable land and the economy is the strongest in the state, she adds.

In the Bay Area, the index was at 2.7 months in August versus 4.5 months a year ago. The lowest inventory level in the Bay Area was 0.9 month in December 2004 and the long-run average from 1992 to the present is 4.7 months, lower than the statewide long-run average of 6.5 months, Appleton-Young says.

Even the Inland Empire, scene of tremendous overbuilding, has seen a shortage develop – the region’s unsold homes index was 3.3 months in August compared with 4.5 months a year ago.

“There is no question there is a shortage of homes for sale even in places like Stockton, which not long ago had years of inventory,” says Sean O’Toole, chief executive of ForeclosureRadar.com. “Prices became very attractive in those (hard-hit) areas and provided a great return for investors and a great opportunity for first-time buyers. That inventory went away very quickly as people realized a bargain was to be had. There are not so many bargains at this point.”

Not flipping

Unlike investors who five or six years ago were buying distressed properties to flip for a quick profit, investors today “are coming in because rental yields are providing a nice rate of return,” says Lawrence Yun, chief economist with the National Association of Relators.

That means those homes probably won’t be coming on the market anytime soon.

Nationwide, the glut of homes has also evaporated. In July, there was a 6.4-month supply of homes compared with 9.3 months in July 2011. The current number is right around long-term average, but Yun says there are “acute shortages” in places such as California, Arizona Nevada and parts of Florida.

So what has become of the so-called shadow inventory of foreclosed or distressed properties that banks have supposedly been keeping off the market and could unleash at any time, causing another leg down in the housing market?

O’Toole says the shadow inventory is like a funnel. “It starts with people being underwater, some of them stop making payments, some of those end up in foreclosure.” The homes that end up in foreclosure eventually end up on the market.

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The New New-Home Market

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For information about luxury real estate in Southern California, call Bob Cumming of Keystone Group Properties at 310-496-8122. Keystone Group Properties services buyers and sellers of distinctive Southern California homes along the West Coast and Beverly Hills.

The New New-Home Market

The bad news for buyers: The new market environment means less discounting, fewer incentives and, in some cases, longer waits for homes. But there are several steps you can take to be a better shopper—from choosing amenities judiciously to waiting until a home is partially built before pulling the trigger on a deal.

Low interest rates and improving economic conditions are persuading people like Jerold Hawkins to take the plunge. Mr. Hawkins, a software developer for the auto industry, and his wife, Katherine, a nurse, recently agreed to buy a new five-bedroom home in Rochester Hills, Mich., for $289,900. “I now have a really good job and so does my wife,” Mr. Hawkins says.

PulteGroup

A Pulte Homes “Ellsworth” house in the Grand Vista Estates development in Northville, Mich.

The auto industry’s recovery has spurred demand for new homes in the $180,000 to $500,000 price range in the Detroit area, says Dan Elsea, president of brokerage Real Estate One in Detroit. In the choicest neighborhoods, even homes built without a ready buyer often sell long before completion and with multiple offers, he says.

After the new-home market’s dismal performance of the past few years, any improvement is welcome. The median price plunged 22% from its peak of $262,600 in March 2007 to a low of $204,200 in October 2010, with some markets tumbling 50% or more. Just 306,000 new homes were sold last year, according to the U.S. Commerce Department, the lowest on record.

But the tide seems to be turning. New-home sales rose in July for the third time in four months. And with inventories at record lows, builders are trimming incentives and raising prices in markets such as Detroit, Houston, New York and Phoenix.

Overall, sales of new homes surged 22% from September through July, according to the National Association of Home Builders. The median price of new homes sold in July stood at $224,200, up 9.8% from their 2010 lows.

Workers in July frame the first home in a new community in Gilbert, Ariz. Prices and waiting times for new homes in the Phoenix area are starting to rise.
“We’re clearly in recovery,” says Douglas Yearley Jr., chief executive of luxury builder Toll Brothers TOL -1.60%in Horsham, Pa., which builds in 20 states nationwide. In August, Toll reported the most sustained demand in more than five years. Stronger markets include Connecticut, Massachusetts and New York, while Illinois and Las Vegas are softer, the company says.

Billie Armenta, a government employee, says she is surprised the $294,900 base price of her new home in Phoenix has risen by more than $33,000 since she and her husband, Ruben, a retiree, signed their contract in January. The couple had to wait six weeks for an appointment at the design center and nearly eight months for construction to be completed.

The much larger market for existing homes is perking up as well. Prices in June posted their first year-over-year increase in nearly two years, according to the S&P/Case-Shiller index of 20 major metropolitan areas. From September 2011 through July 2012, sales jumped 5%, according to the NAHB.

To be sure, the housing recovery is still in its infancy, with credit tight and sales and prices well below historical levels. Rising interest rates, an uptick in the supply of foreclosed homes or a weakening economy all could crimp sales.

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But after years of retrenching, builders have whittled down their stockpiles greatly, and are being cautious about bringing new homes to market. The inventory of unsold new homes now stands at 144,000, down from a peak of 575,000 in July 2006, the Commerce Department reports.
At the current sales pace, that’s a 4.9 month supply of new homes; six months is considered a balanced market, says NAHB chief economist David Crowe.

Big Changes

One of the biggest changes since the downturn is where new homes are being built. The new homes are located much more closely to job centers than they were five years ago, says John Burns of John Burns Real Estate Consulting in Irvine, Calif.

Some builders are rolling out features not likely to be found in the resale market. KB Home, KBH -5.49%which is based in Los Angeles and builds in 10 states and Washington, D.C., lets buyers choose whether the master bedroom is on the first or second floor. In Southern California, it has consulted with feng shui masters on home design.

PulteGroup, PHM -2.36%which is based in Bloomfield Hills, Mich., and builds in 29 states, offers the “Pulte Planning Center,” a secondary office space off the main living room that helps homeowners stay organized and monitor their children’s homework.

The New Home Co. in Aliso Viejo, Calif., offers a multigenerational home with a private living space for an older parent or child returning home after college. “We can take any walk-in pantry we have and turn it into a separate cooking facility,” says New Home Chief Executive H. Lawrence Webb. Lennar, LEN -1.45%meanwhile, offers a “Next Gen” home aimed at baby boomers with aging parents or boomerang kids.

Builders also are touting energy efficiency. Meritage Homes, MTH -3.67%which is based in Scottsdale, Ariz., and builds in seven states, lets buyers spend the credits they can apply to upgrades or financing on solar panels; in some model homes, an entire room is deconstructed to highlight energy-efficient features.

Another change: Homes are starting to get larger again, after falling during the housing downturn. Among new homes sold in the first half of 2012, the median square footage was 2,013, up from a recent low of 1,945 in 2009, according to Hanley Wood Market Intelligence.

Experts say larger homes are more attractive to the trade-up buyers who now dominate the new-home market. Steve Ruffner, president of KB Home, Southern California, says buyers can afford bigger homes because prices and interest rates have fallen.

Of course, what you will get for your money depends on local conditions. If you are thinking about a new home, here are some points to consider.

Don’t be fooled by the sticker price. “The base price always looks incredibly good,” says Lloyd Fox, a real-estate broker at Long Realty in Scottsdale, but upgrades typically add 10% to 15%, sometimes more.

Billie Armenta, the Phoenix home buyer, says the purchase price for her home rose by more than $55,000 to $350,000 once the fee for a choice lot, carpeting, higher-quality cabinets and other upgrades were figured in.

Expect to pay a premium. The median new home sold for 36% more than the median existing home last year, excluding distressed properties that were foreclosed on, according to Hanley Wood.

That spread is wider than in the recent past. The gap had narrowed to just 28% in 2009, when builders were scrambling to unload the last of the inventory built during the housing boom. Since 2005 the gap has averaged 34%.

Remember that location matters. Your ability to negotiate a good deal can vary even within the same locale. “We have some markets where we’re raising prices on every plan pretty significantly,” Standard Pacific chief financial officer Jeff McCall told investors in July. “And then 10 miles down the road we have stagnant pricing.”

Closer-in developments generally command a premium versus homes in outlying areas.

In Tucson, builders are offering discounts from the list price on homes built without a ready buyer in the Dove Mountain area, which was hard hit by the housing bust, says Laura Sayers, a vice president at Long Realty. Less than 10 miles away, in Oro Valley, demand for new homes is so strong there is a waiting list for new lots, she says.

Negotiate aggressively. Incentives are getting smaller, on average, but buyers in some markets still have a fair amount of bargaining power.

In the Tampa Bay, Fla., area, builders are buying down interest rates, paying closing costs and tossing in appliances, says Jaci Stone, an agent at Century 21 Beggins Realty, who had one builder kick in two months’ rent so a client could break a lease.

Hayley and Tyler Sutterby nabbed $20,000 in upgrades instead of the standard $8,000 package when they recently bought a four-bedroom home under construction in Lithia, Fla. The couple is spending the credits on higher quality cabinets and flooring, a tankless water heater and other energy-saving features, says Ms. Sutterby, who works in marketing for a cable company.

Be tactical. The closer a home is to completion, the fewer choices you get to make, but the more likely the builder is to make a deal. That’s because builders don’t want to end up saddled with finished homes.

So keep an eye out for homes that are near completion or are in inventory, says Ms. Stone, the Tampa agent, who adds that publicly traded builders are often more willing to make a deal at the end of the quarter or fiscal year.

Prepare to wait. When home prices were tumbling, buyers were regularly advised to sell their current homes before buying new ones—or risk being stuck with two mortgages. But with inventories at record lows, buyers might have to wait three to six months for their new home to be completed.

That can make timing tricky for move-up buyers. Martin Mitchell, vice chief executive of Mitchell & Best Homebuilders in Rockville, Md., suggests that buyers in stronger markets prepare their home for sale, but wait until construction is under way before bringing it to market. Another option: sell your home and rent it back for a few months.

Understand your financing options. Builders often will pay closing costs or provide other incentives if you get your mortgage from them. But the deals offered by builders aren’t always better than what you might get from another lender, says Greg McBride, a senior financial analyst at Bankrate.com.

Because their credit lines are limited, more builders are asking buyers to take out construction loans that roll into a standard mortgage once the home is completed instead of having the builder finance the construction from its own credit line, with the borrower taking out a mortgage when the sale closes. The bank makes payments to the builder, typically as construction goals are met, with the buyer generally paying interest only on the funds used.

Anyone considering this option, “should at least have some sense of what the permanent financing costs will be,” even if you can’t lock in a mortgage rate, to make sure payments are affordable, advises Keith Gumbinger, a vice president at mortgage-data provider HSH.com.

To reduce fees, arrange to close on both loans at the same time instead of closing first on the construction loan and then later on the mortgage

The Serial Refinancers

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The Serial Refinancers

Cheap Mortgages Have Sparked a Trend; Should You Join?

Homeowners eager to lock in lower monthly mortgage payments have discovered serial refinancing, a practice last in vogue during the housing boom.

To keep up with falling rates, almost 2.2 million homeowners have refinanced their mortgages at least twice since 2009, according to data compiled for The Wall Street Journal by SMR Research, a mortgage-research firm in Hackettstown, N.J.

From 2006 through 2008, some 3.5 million homeowners refinanced at least twice.

There is little incentive to stop refinancing. Rates are still hovering near record lows, and lenders increasingly are offering to waive some or all of the closing costs for the borrower, making refinancing effectively free—or at least very cheap.

Dean Spalding, a financial-services executive in Louisville, Ky., has refinanced his 15-year mortgage—which now has a balance of roughly $350,000—four times since 2009, including twice in the past 12 months. Over this period, his rate has dropped from 4.25% to 2.875%. After his last refi, he says his monthly mortgage payment dropped by about $150.

“It has been a no-brainer,” says Mr. Spalding, who used First Commonwealth Mortgage, a mortgage broker based in Louisville.

The last time homeowners were so eager to refinance, it was a more expensive proposition. At the height of the housing boom, 86% of borrowers who refinanced took out cash and ended up with a higher loan amount, according to Freddie Mac.

To do so, they typically agreed to pay thousands of dollars in closing costs and often a steep prepayment penalty, a fee levied on those who paid off a substantial portion or all of a mortgage typically in less than four years.

Those costs made refinancing prudent only for those who could get a significantly better rate—often two percentage points or more, financial advisers said—and expected to stay in their houses long enough for the monthly savings to offset the upfront costs.

Today, lenders say, some borrowers are refinancing when rates drop as little as three-eighths of a percentage point.

“The traditional rules of refinancing are no longer in play,” says Bruce Thielen, a vice president at NASB Financial.

So what is the catch? In exchange for waiving closing costs, lenders charge a slightly higher interest rate.

The numbers vary by lender and type of mortgage, but in order for 1% to 1.75% of the loan amount to be applied toward closing costs, a lender typically raises the rate by 0.25 percentage point or more, says Mark Goldman, a senior loan officer at C2 Financial, a mortgage brokerage based in San Diego.

This trade-off entices homeowners to refinance, bringing much-needed business to lenders at a time when a still-sluggish housing market has hurt the market for new mortgages.

For many borrowers, it means a lower rate than they’re currently paying and no closing costs. They no longer have to commit to a home for a specific period to recoup their expenses, which means they can sell if they need to, without having to eat the refinancing costs.

Wiping out these costs also encourages serial refinancers to come back to refinance again when rates drop by even a small amount, especially for borrowers with large mortgages, says John Shunnarah, CEO of First Commonwealth Mortgage, where he estimates 30% of clients have refinanced two or more times since 2009.

There are drawbacks to this strategy. For borrowers who plan to stay in their homes for a while, the higher rate can eventually outstrip the savings in closing costs, says Michael Moskowitz, president of Equity Now, a New York-based mortgage lender. In those cases, it would be better to pay the closing costs and get a lower rate.

To be sure, refinancing isn’t an option for every homeowner. Some borrowers with poor credit scores might not be able to obtain a rate that’s low enough to make refinancing viable. Homeowners who owe more on their mortgage than their home is worth can try the federal government’s Home Affordable Refinance Program if they qualify.

Potential refinancers who are unsure how long they will keep the new mortgage should favor the lender willing to waive the most in closing costs while raising their rate by the least amount, experts say. That will allow them to stay in the home for a longer period before the mortgage becomes more expensive than if they had chosen to pay the closing costs upfront and get a lower rate.

Separately, borrowers who select a 30-year term each time they refinance will be extending the total repayment period, says Keith Gumbinger, a vice president at HSH.com, a mortgage-info website. They might also pay more in interest overall.

For many homeowners, though, refinancing pays off. Anna Pembedjian, a public-policy adviser who lives in Glendale, Calif., refinanced her mortgage twice in the past three years. Her lender offered to waive about half of her closing costs both times, which she says made the decision an easy one.

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