September 2010

4 Tips for Setting the Right Sales Price

Sellers think their homes are worth more than their real estate professional recommends, and buyers think these same homes are worth less.

It’s a difficult disconnect that makes selling properties a challenge. Successfully marketing a home requires that the price be set carefully — or it will languish on the market. Among the considerations:

  • How many homes are for sale in the neighborhood? The more homes on the market, the more important it is to list at the lower end of the scale. “I want buyers to ask why is this house priced so competitively,” said NAR President-elect Ron Phipps of Phipps Realty in Warwick, R.I. “I want the answer to be an offer.”
  • Take short sales and foreclosures into consideration when pricing. If the competing properties are in lousy condition, they are less of an issue, but if they are well taken care of, yet priced 25 percent below market, they can be a serious factor.
  • Negotiate decisively. “Buyers are not interested in back-and-forth negotiations these days,” Phipps said. “They are less emotional and more disciplined. They will walk away.”
  • Cut the price when you have to. If no one shows up for an open house, if no one calls and if there are no offers, then the price is too high. That means it’s time to make a meaningful price cut.

Source: The Washington Post, Associated Press (09/18/2010)



The great debt drag

America looks likely to avoid a second recession. But with households still overburdened by debt, years of slow growth lie ahead

Sep 16th 2010 | WASHINGTON, DC | From The Economist print edition

IN THREE decades of selling cars in southern California, David Wilson has been through countless ups and downs. So when sales at his 16 dealerships, mostly around Los Angeles and Orange Counties, fell by a third in 2008, he naturally expected them to go up again. They still haven’t.

Mr Wilson now realises that his boom-year sales were a by-product of the state’s housing bubble. Dealers reckon that before the crisis a third of new cars in California were bought with home-equity loans. “Now there’s no home equity,” says Mr Wilson, “there’s no down-payment for cars.” He foresees no sales growth for another two to three years. “The country is not optimistic. If you’re not optimistic you don’t buy a new house or new car.”

He’s right: Americans are not optimistic. Official statistics say that the economy has been growing for nearly 15 months, but so sluggishly that most people seem to think it is still in recession. For a few months it looked as if the economy might even shrink again, as growth slowed to a mere 1.6% (at an annualised rate) in the second quarter, job creation almost stopped and home sales plunged.

Admittedly, the second quarter may have been unlucky, as Europe’s debt crisis and the BP oil spill sapped business confidence and an anomalous surge in imports ate into growth. More recent indicators on jobs and trade have all but put to rest fears of an imminent return to recession. A burst of corporate mergers, including several bidding wars, suggests business’s animal spirits are returning. Nevertheless, in the third quarter the economy has probably been growing at a rate of only 1.5-2%. A pace of 2-2.5% is likely in the fourth.

Since the recovery began, the economy has grown at a rate of less than 3%. That is faster than its long-term potential, of about 2.5%, but America has woken from past deep recessions at rates of 6-8%. Job creation has thus been too feeble to bring down the unemployment rate, which at 9.6% is much as it was at the start of the recovery. “Progress has been painfully slow,” acknowledged Barack Obama on September 8th—not what a president likes saying less than two months before an election.

What makes this recovery different is that it follows a recession brought on by a financial crisis. A growing body of research has found that such recoveries tend to be slower than those after “normal” recessions. Prakash Kannan, an economist at the IMF, examined 83 recessions in 21 rich countries since 1970. In the first two years after normal recessions growth averaged 3.7%. After the 13 caused by crises, growth averaged 2.4%. America has been doing slightly better than this (see chart 1).

The Federal Reserve brought on most post-war recessions by raising interest rates to squeeze out inflation. When the Fed cut rates, demand revived. Financial crises interfere with the transmission of lower rates to private borrowers. People can’t or won’t borrow because the value of their collateral—in particular, houses—has fallen. Banks are less able to lend because their capital has been depleted by bad loans, or less willing because customers can’t meet tighter underwriting standards.

“Where we are in the economy shouldn’t be surprising,” says Vikram Pandit, chief executive of Citigroup. Mr Pandit sees only two sure things ahead: that American consumers will continue to cut their debt (deleverage, in financial argot) and that emerging markets will grow quickly. At Citi, transaction-service revenues, such as foreign-exchange and cash management for multinationals, are growing healthily while revenue from American consumer loans is shrinking.

This reflects the economy as a whole. Exports have kept growing this year—but so have imports, so net trade has not contributed much to growth. Indeed, the IMF, which thought a year ago that trade would add to growth over the next four years, now sees it subtracting, in part because of trading partners’ slower growth. Business investment in equipment, brisk early in the recovery, has slackened. Firms may be reluctant to invest and hire partly because of uncertainty over Mr Obama’s regulatory and tax initiatives, but concern about consumer spending seems more important. Government spending has helped fill the hole, with direct federal injections of cash and cuts in taxes. But much of the federal effort has been neutralised by state and local cuts. And the stimulus is winding down. The end of a tax credit has caused the housing market new pain.

So if the economy is to grow much faster than its 2.5% trend, consumers must start borrowing and spending again. What is holding them back: are they reluctant to borrow, or are banks unwilling to lend?

Atif Mian of the University of California at Berkeley and Amir Sufi of the University of Chicago have found a close correlation at county level between car sales and household debt. The heavier the debt in a county at the start of the recession, the weaker sales have been since (see chart 2). Mr Sufi says large national banks have customers everywhere. So the sales gap suggests that debt-laden households are unable or loth to borrow.

This tallies with Mr Wilson’s experience. Leasing, which requires little or no down-payment, has grown from 25% of his business before the crisis to 40%. A customer who has defaulted on his mortgage but not his car payments can still get a car loan. But his interest rate and down-payment will be much higher—and may be unaffordable. And the heavily indebted need time to repair their finances. Melinda Opperman of Springboard, a credit-counselling agency with offices in five south-western states, says a typical debt-management plan takes three to five years to complete.

Tight-fisted, or frightened?

On the other side of the table, banks seem to have plenty to lend. Their capital equals almost 12% of assets, up from less than 9% in 2006. Recently analysts asked Mr Pandit why he was letting capital “build to ridiculously high levels” and why cash and other sources of liquidity “seem to keep going up all the time”. Moody’s, a ratings agency, has estimated banks’ total loan charge-offs between 2008 and 2011 at $744 billion, of which $476 billion has already been recognised in their accounts. They have enough loan-loss reserves to cover 80% of the remaining $268 billion.

But no one is really sure whether banks have adequately disclosed, or even know, their ultimate exposure. The IMF estimates that 11m properties are worth less than the mortgages secured on them, and that 7.6m of these are heading for foreclosure or are at risk of it. Banks have probably not recognised the likely losses on many of these loans, but there is no way of knowing. Christopher Whalen of Institutional Risk Analytics, a research firm, thinks charge-offs are understated by a third.

How long will deleveraging take? In a recent paper Carmen Reinhart of the University of Maryland and her husband Vincent Reinhart of the American Enterprise Institute looked at 15 crises since 1977. They estimate that on average deleveraging lasted seven years, during which growth was a percentage point lower than in the decade before a crisis. If America follows this pattern, its GDP will grow by 2.4% for the next four to seven years. Because that roughly equals potential, job creation should only just match population growth: the unemployment rate won’t fall.

Few economists are that gloomy. Most think a prolonged period of easy monetary policy and a slow release of pent-up demand for durable goods and homes can yield growth of at least 3%. Some also think that deleveraging is ahead of schedule. Richard Berner of Morgan Stanley predicts that, thanks in part to falling interest rates, debt service will be back to a “sustainable” 11-12% of disposable income later this year. Peter Hooper and Torsten Slok of Deutsche Bank reckon that if saving stays at about 6% of income, write-offs remain near today’s elevated level and household income rises by 4.5% a year, household debt will fall from 126% of disposable income now to around 85%, where it was in the early 1990s, by 2013 (see chart 3).

These calculations will be wrong if incomes stumble or consumers seek to save more than expected. The IMF notes that saving rates in Finland, Norway and Sweden ultimately rose by five to ten percentage points after housing busts in the late 1980s. America’s saving rate has gone up by four points so far.

More cheerfully, the Reinharts find that once economies start to grow after a crisis they tend not to slide back into recession without suffering some new shock. Spain, whose banking crisis began in 1977, was dragged back by global monetary tightening in the early 1980s. Countries recovering from the East Asian crisis of 1997-98 were hit by avian flu, the bursting of the American tech bubble and the economic effects of the terrorist attacks of September 11th 2001. Japan is a special case. It was shoved back into recession partly by its own policies: an ill-timed tax increase in 1997 and the (temporary) ending of the Bank of Japan’s zero-interest-rate policy in 2000.

American policymakers seem determined to avoid Japan’s mistakes. Unless the outlook improves dramatically the Fed is likely to resume quantitative easing (buying bonds with newly printed money in an attempt to drive long-term interest rates even lower). The subject will be on the table at its meeting next week. Fiscal policy is more of a problem: more stimulus is unlikely and it is unclear whether George Bush’s tax cuts, due to expire in December, will be extended. Senate Republicans want to keep them all; Mr Obama wants rid of those for the rich.

Without more action, though, deleveraging could drag on for a long time. South Korea and Sweden owed their relatively robust recoveries to policies to remove bad loans from banks’ balance-sheets. That was the original purpose of the Troubled Asset Relief Programme (TARP), before it was used to recapitalise banks, bail out carmakers and subsidise loan modifications.

America could hasten deleveraging and improve workers’ ability to move to new jobs by being more eager to cut the principal on mortgages to sums closer to homes’ actual values. That would often both be cheaper for lenders than foreclosure and let owners keep their homes. But cuts in principal have been rare—applied to a mere 120 of the 120,000 mortgages permanently modified through the federal government’s programme between October 2009 and March 2010. Banks don’t want to let borrowers who can really pay off the hook, to give others an incentive to default, or to recognise more losses.

Bankruptcy laws could be changed to allow courts to reduce principal, much as they can for the debt of a company in Chapter 11. John Geanakoplos of Yale University has argued for special federal trustees, empowered to insist on modifying or foreclosing impaired loans. They would choose the course giving the lender the highest return.

However, forcing banks to recognise losses would erode their capital. Some could raise more if they needed it, but others might fold. Since the TARP was wound down, the federal government has no money for buying the loans or recapitalising banks—and there is no political appetite for doing so. Indeed, arguably the opposite is happening as Fannie Mae and Freddie Mac, the two nationalised mortgage agencies, seek to compel banks to buy back loans of doubtful quality they had sold to the agencies.

There are, in theory, many ways to hasten recovery after a crisis. But Mr Reinhart says that policymakers are usually too “timid” to pursue them. In that respect, America is following the script.


Where Is the Shadow Inventory?
Alan Mallach of the Brookings Institution throws in his two cents about what’s happening with high number of distressed properties owned by banks.
Read more >
NAR and Move, Inc. Pave the Way for Innovation
NAR and Move, Inc., announce an updated agreement to their 14-year working relationship.
Read more >
CoreLogic Predicts Days On Market Could Double
The real estate analysts at CoreLogic believe that with the tax credit expiring and inventory levels high, properties could take twice as long to sell.
Read more >
New Hampshire Tops List of States with Highest Income
The U.S. Census Bureau named the “Live Free or Die” state as the area with the highest median income.
Read more >
Number of Price Reductions Rise in Some Cities
According to real estate Web site, more home owners are cutting prices.
Read more >

95% financing is BACK! Really back!!!!! We re-introduced it a while ago however the qualifying guidelines were very strict. As of TODAY, our MI company has released Contra Costa County as a “non-distressed” market…and with that comes very reasonable qualifying guidelines. Hooray! This is a highly viable alternative to FHA.

As a result of our continued monitoring of conditions in the mortgage and housing markets, we have updated the PMI Distressed Markets List.

Effective September 17, 2010, the following 25 MSA/MSADs (nearly 1,300 zip codes) have been removed:

25260 Hanford-Corcoran, CA
34900 Napa, CA
36084 Oakland-Fremont-Hayward, CA (MSAD)
40900 Sacramento-Arden-Arcade-Roseville, CA
44700 Stockton, CA
46700 Vallejo-Fairfield, CA
24300 Grand Junction, CO
35300 New Haven-Milford, CT
38940 Port St. Lucie, FL*
39460 Punta Gorda, FL*
15260 Brunswick, GA
14260 Boise City-Nampa, ID
19180 Danville, IL
37900 Peoria, IL
19060 Cumberland, MD-WV
41540 Salisbury, MD
30340 Lewiston-Auburn, ME
25860 Hickory-Lenoir-Morganton, NC
13780 Binghamton, NY
24020 Glens Falls, NY
35004 Nassau-Suffolk, NY (MSAD)
49620 York-Hanover, PA
34100 Morristown, TN
49020 Winchester, VA-WV
31020 Longview, WA
*Attached housing is not eligible in the state of Florida.

Effective November 1, 2010, the following 9 MSA/MSADs will be added:

41940 San Jose-Sunnyvale-Santa Clara, CA
42100 Santa Cruz-Watsonville, CA
42220 Santa Rosa-Petaluma, CA
28100 Kankakee-Bradley, IL
43780 South Bend-Mishawka, IN-MI
25180 Hagerstown-Martinsburg, MD-WV
35644 New York-White Plains-Wayne, NY-NJ (MSAD)
39100 Poughkeepsie-Newburgh-Middletown, NY
39300 Providence-New Bedford-Fall River, RI-MA

The updated PMI Distressed Markets List is available for your review. Note that loans may be subject to additional underwriting guidelines or restrictions. For example, the lender or appraiser might determine that the property is in a distressed market that is not on the PMI Distressed Markets List. When this is the case, the loan would still be subject to PMI’s Distressed Markets Policy.

Please review our PMI Distressed Markets Policy for complete requirements or call me for more information.

We are committed to achieving affordable, responsible and sustainable homeownership in all the communities we serve, and we appreciate the opportunity to work with you to achieve this goal.


Have A Great Weekend~


The Meredith Mortgage Team, CMPS® 

Certified mortgage planning specialist

“We Will Always Have Your Best  

  Interest In Mind”   



Erin & Kathleen

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Mortgage Banker and Broker


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Home Buying and Selling Tips for Fall
HGTV’s real estate site Front Door says the weeks between now and the end-of-the year holidays are the best ones to find a bargain. Here are some of their tips for fall buyers and sellers:

Fall Sellers:
· Replace faded summer plants with fall-blooming flowers and add autumn decorations to the home.
· Expect low-ball offers and be prepared with higher counter offers.
· Freshen up listing photos by shooting pictures that make it less obvious that the seasons have changed.
· Price the home to sell. A price that is a little lower than the competition may be a winning move.
· Be willing to show the property and hold open houses whenever potential buyers are ready.

Fall Buyers:
· Look for motivated sellers who have a reason to move on by the end of the year.
· Explore new constructions. Builders are often particularly interested in selling before the new tax year.
· Beware of fall maintenance issues. Consider overflowing gutters and leaf-covered lawns warning signs.
· Shape offers carefully. Even in this market it is possible to turn sellers off with a too-low bid.

Source: (09/16/2010)

Investor, heal thyself

The last of our series of profiles on financial institutions looks at America’s biggest pension fund, which is taking a stiff dose of its own medicine

Sep 16th 2010 | SACRAMENTO | From The Economist print edition

FOR years, underperforming companies have lived in fear of a tongue-lashing from the California Public Employees’ Retirement System (CalPERS), which has led a crusade to improve the quality of corporate governance in America. It is therefore somewhat ironic that CalPERS now faces criticism for losing billions of dollars during the downturn and for failing to run a tight ship. Anne Stausboll, the fund’s chief executive, and Joseph Dear, its chief investment officer, are working overtime to repair the damage done to the pension behemoth’s assets and its reputation during their predecessors’ reign.

Much is riding on their efforts, which were reviewed at a meeting of the fund’s board in Sacramento this week. CalPERS provides health and retirement benefits to over 1.6m beneficiaries, including doctors, firemen and policemen. If it cannot achieve the investment returns on its $200 billion portfolio needed to help pay for workers’ benefits, then these may have to be cut or the state’s taxpayers could end up picking up the bill. Given that California is already grappling with a $19 billion budget deficit, that is an alarming prospect.

Admittedly, CalPERS is not the only public pension fund in America nursing a nasty hangover. But its woes are striking because they stem from racy investment bets, poor risk management and a lax attitude towards potential conflicts of interest at an institution that was supposed to be a model of modern fund management.

Consider those investments first. CalPERS loaded up on real estate, private equity and other illiquid assets in the years before the crisis. These boosted the fund’s performance, helping it grow to $250 billion by mid-2007. But when the meltdown began their prices promptly plummeted. As a result, CalPERS’s returns were -23% in its financial year to the end of June 2009 (see chart). Returns for the median public pension fund with more than $5 billion of assets were -19%, according to Wilshire Associates, an investment-consulting firm. In particular, the fund made too many bets on risky properties, including a $500m investment in a vast housing complex in Manhattan, since written off.

CalPERS has also been caught up in a furore over the activities of “placement agents”, who help financial firms win investing assignments from big pension funds in return for a fee. Some critics have claimed agents create a “pay-to-play” culture in which outside firms win contracts based on whom they know rather than on their merits—a charge that agents dispute.

In May California’s attorney-general filed a lawsuit against Alfred Villalobos, a former CalPERS board member, accusing him of improperly using his contacts at the fund to help other firms win business from it. Mr Villalobos has denied any wrongdoing, as has Fred Buenrostro, a former CalPERS chief executive who was also named in the suit. “The attorney-general should not have filed this case because Mr Villalobos has always acted appropriately,” says Neal Stephens, Mr Villalobos’s lawyer.

 They’ve cashed in their CHiPs

Last year CalPERS changed its policy to force external money-managers to disclose whether they are using placement agents to solicit business and how much they are paying them. It has also taken other long-overdue steps to bolster transparency, including banning staff from accepting gifts from business partners.

Such actions are part of a broader set of initiatives designed to mark a fresh start at CalPERS. Among other things, the fund has imposed tougher controls on the use of leverage, cut almost $100m from the $1.2 billion it pays each year to outside managers and reduced its exposure to troublesome real estate. “I cannot overstate our determination to make this a new day here,” says Mr Dear, who joined CalPERS in March 2009. Ms Stausboll was named chief executive in January that year.

California risking

Mr Dear also seems determined to hit the 7.75% annual rate of return that CalPERS says it needs to achieve to meet its commitments, though the target could change as the result of an internal review. In its most recent financial year, the fund made a return of over 11%, but some observers reckon it will struggle to meet its target in future without taking more risks.

CalPERS can point to the fact that over the past 20 years it has earned an average annual return of 7.9%. But returns from conventional assets such as stocks and bonds are unlikely to be as helpful as they once were. That explains why, in spite of recent history, Mr Dear remains keen to pour more money into riskier assets such as emerging-market stocks, private-equity funds and big infrastructure projects. In June, CalPERS agreed to pay up to £106m ($156m) for a stake of almost 13% in Britain’s Gatwick airport, marking its first big direct investment in infrastructure.

Given CalPERS’s long-term investing horizon, such bold bets could pay off. But Mr Dear says he knows the fund also needs to get better at making short-term tweaks to its portfolio if the need arises. Some critics think that CalPERS should be lowering its sights instead. David Crane, who advises California’s governor on economic policy, says the 7.75% goal is “wildly unrealistic” and reckons the target should be closer to 6%. “These guys are swinging for the fences and we, the taxpayers, will bear all of the risk,” he cautions.

Mr Crane is not the only one who is concerned. At an open meeting of the board’s investment committee on September 13th, the treasurer of a small Californian utility made a plea for CalPERS to reduce volatility in its portfolio. “It looks more like we’re gambling,” he chided, pointing to the 14% of the fund’s assets that are still invested in private equity. The snag is that if CalPERS takes less risk, generous public-pension schemes will almost certainly have to be renegotiated. That is one governance test that California’s politicians and unions will be loth to take.


Taming the banks

The public’s urge for revenge may not have been sated, but the new Basel rules make sense

Sep 16th 2010 | From The Economist print edition

TWO years ago the collapse of Lehman Brothers heralded a frightening period for the world economy. As one bank after another toppled, or came close to doing so, regulators worried that cashpoint machines would fail to operate and that companies would be unable to meet their payrolls. A second Great Depression seemed to beckon.

Extraordinary efforts were made to bail out the banks, including state guarantees, partial nationalisations, near-zero interest rates and massive fiscal deficits. The public seethed at the banks’ profligacy. Surely finance would be reformed, as it was in the 1930s when America created a new regulator, the Securities and Exchange Commission, and separated casino-like investment banking from retail banking?

Two years on, the landscape of finance has altered somewhat. Take hedge funds: the crisis wiped out around a quarter of their assets and forced many mediocre ones out of business. Many private clients left in disgust when they found that these self-proclaimed superstars could lose money; the client base is increasingly dominated by institutions, which should insist on more transparency and better risk management. In private equity, the poor performance of the 2006-07 vintage of deals is making it harder for firms to raise money; one manager, Candover, is giving up the ghost.

But it is the banks that matter most; and, in banking, it is remarkable how little has changed. Many banks are still “too big to fail” and the casino side of their activities remains mixed up with the mundane business of deposit-taking. Bankers are once more earning huge bonuses. How could this be?

Breaking up the banks might have satisfied taxpayers’ desire for revenge, but it is not clear what problems it would have solved. Anglo Irish Bank and Northern Rock collapsed not because they were too big, nor because they were playing the markets: they were classic “narrow” banks which failed in the traditional fashion—borrowing short to lend long against property that turned out to be overvalued. The problems of the Spanish cajas show that a financial system with lots of small banks is not necessarily safer.

Still, the crisis made it painfully clear that the world’s banking system needed new international rules to impose lending discipline and guard against any temptation to migrate to the weakest regulatory regime. A new set, known as Basel 3, has been proposed (see article). They will not satisfy radicals, but they will probably do the job.

The purpose of the new rules is to ensure that banks have more capital when they face the next crisis, and are thus better able to cope with bad debts. The core Tier 1 ratio will rise to 7%, slightly less than expected but still a lot better than before the crisis (at the end of 2007, Royal Bank of Scotland had a ratio of just 3.5%).

The timing is more questionable. The new requirements are being phased in slowly, under pressure from those countries, such as Germany, which escaped the worst of the crisis. The final deadline is not till 2019. Regulators reckon the rules are fairly tough but critics think this deadline is excessively generous. The fact that bank shares rose in response to the Basel announcement will add to cynics’ suspicions that the banks have been given too much time.

For the moment, the system does not look dangerously undercapitalised. Most large, internationally active banks in America, Britain and Switzerland already meet the new requirements. As for other banks that don’t, imposing higher capital ratios on them immediately might only discourage them from lending money to businesses, at a time when credit is already scarce.

More, please

The rules are sensible, so far as they go, but more needs to be done. In particular, it is vital that regulators deal with the “outliers”, banks that lose more than average in a crisis. The best way to do that is to create a layer of debt that regulators can write off, or convert into equity, if necessary. National regulators should also firm up the rules on counter-cyclical capital, requiring banks to strengthen their balance-sheets during booms, rather than busts; this would help prevent a credit spree like that in 2005-06, and provide the banks with a cushion during a downturn. Extra rules may be needed for firms in the “too big to fail” category. And some banks need to reduce further their reliance on short-term borrowing.

These reforms will not turn the masters of the universe into model citizens overnight. Bankers circumvented the last lot of Basel rules, and regulators will have to watch out for attempts to do the same this time around. But higher capital requirements should eventually reduce the riskiness of banks, cut into their profit margins and constrain bonuses. The punishment may not seem commensurate to the crisis they caused; but reducing risk is more important than getting revenge.

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