Residential this time around

Here is this months article: http://www.sbsun.com/business/ci_13283662

Thanks to Meagan who wrote it and let me take credit for everything.

Housing rebound? Not yet

Home prices nationally are on an upswing in the second quarter of 2009, according to the S&P/ Case-Shiller home price index. This is because the national index reported its first positive quarter-to-quarter increase in more than three years, meaning that home prices for the nation as a whole are starting to rise - a sign of light at the end of a very long tunnel.

But that light may be just barely flickering, and even on its way out.

A government program that offers first-time home buyers $8,000 is set to expire by Nov. 30 of this year. This program has effectively been pulling home sales demand from next year into this one.

Bruce Norris of The Norris Group, an Inland Empire real estate investment company, also has a warning about reading too much into rising home prices. Multiple offers on listed properties would normally drive prices up, but "this time it is a completely false indicator due to foreclosure moratoriums artificially lowering inventory." Though buyers are plentiful now, the supply of houses is set to inflate, putting downward pressure back on home prices.

Once we wade past the soundbites (" ... the overall number of existing home sales rose 7.2 percent in July from June, the National Association of Realtors reported. It was the largest monthly gain since the group began tracking existing home sales in 1999."), we are confronted with not only a surplus of foreclosed or soon-to-be-foreclosed homes not yet on the market, but also with option ARMs (adjustable rate mortgages).

These ARMs have payments set to be recast upward beginning in the fall of 2010, peaking in the third and fourth quarters of 2011. These types of mortgages were written between 2004 and 2008 and feature "pick a payment" options. Typically a 30-year loan, option ARMs initially offer the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment and a 30-year fully amortizing payment.

For example, on the 10th month of its fifth year, an option ARM's monthly payment could jump to 2 1/2 times the original minimum payment amount. With property values continuing to drop and unemployment rates continuing to rise, it is unlikely a family faced with an underwater mortgage and an adjustable rate about to balloon will keep making, or be able to make, the mortgage payments.

Asked what would help the market correct itself, Norris advocates "Lenders unloading the inventory, allowing investors to buy and repair the properties." Loan modifications, Norris continues, "have proven to be unsuccessful as they go back into foreclosure over 70 percent of the time."

How have things changed in the past eight months? Norris says "buyers have come out and are once again interested," however, there are obstacles.

"At the top of the list is that the appraisal process is broken," he says. "It used to be that a property appraised at approximately what a willing buyer and seller agreed to. That is the definition of market value. Now, their decision is constantly being trumped by an overzealous appraisal process; mostly driven by automation."

As of May 1, the Home Valuation Code of Conduct was amended to state that brokers and real estate agents could no longer order appraisals. All orders must come from lenders. As it is impossible for national lenders to maintain a database of appraisers in each market, the automated appraisal system has flourished. Web sites do "pre-appraisal appraisals" based on formulas and codes.

"This automated system does not know how to distinguish between a vacant property needing work and a perfectly repaired house," Norris notes.

Though on the surface it looks like the housing crisis is slowly bottoming out, many pressing issues still need to be resolved: lenders dragging their feet in filing foreclosures and modifying mortgages, an appraisal process constantly being tinkered with and short-term government programs that may have long-term consequences.

We are progressing through the largest real estate bust in history, but we are not out of this tunnel just yet.