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In many markets, transactions are starting to be brisk.  Why?  Low price and FHA.  As predicted, FHA with a low 3% down payment is a huge boost to the market.  As lenders increased down payment requirements to 10% in 2007 while simultaneously increasing interest rates and switching emphasis to other products, in came FHA.  Many market already have increased number sales which decreases the months of supply.  If no new listings were added and the current rate continues, the supply issue could be cleaned up within the year. 

FHA is the financing.  FHA has been the choice for 4 out of 5 buyers (around 79%) in the market of the 14,000+ transactions thus far as of May 1.  FHA has been more flexible removing VC conditions while maintaining standards and providing a means by which buyers can achieve their home ownership dreams.  FHA is now up to $346,250 in the area which now includes very nice properties including large, new homes or more desirable communities.  Most sales appear to be well below this number and FANNIE MAE is decreasing it's 10% down payment in a declining market likely to the 5% range.

Some changes are being made where the FHA insurance is likely being change from a standard 1.5% for the FHA loan insurance to a more customized 1.25% up to 2.25% or so for the insurance based on the risk of the borrower.  Also, down payment assistance or closing costs have been included in the market making first time home buyers happy as a clam.  They can now purchase a home up to 50% off 2005 prices with the market continuing to drop like a rock in 2008.

What is driving all this decline?  There is never a simple answer; however, a few indicators are as follows:

-Banks are liquidating. Anywhere from 5-50% of the supply in markets analyzed are bank listings.

-Wall street wants all the 'skeletons' out of the closet.  They enjoyed the increased yields on investments during the good times, but don't like taking the losses which are immense and broad sweeping.  The last of it has not hit yet and massive losses are abounding.

-Employer Sanction Laws - Effective in 2008 an active, recently passed law went into effect where business that hire undocumented workers will be punished.  Rather than this affecting 5% of the population in some parts of the country, some news sources are citing as high as 13% of the population may be affected by this locally in Arizona, specifically in the Phoenix area.

-Sub-prime, sub-prime, sub-prime - This has larger implications that anyone can realize.  Real estate is relative or comparative for both appraisal and for brokers in the market pricing real estate.  Prices being set by unqualified buyers who can't afford a particular property influences what a qualified buyer subsequently pays, even all cash buyers.  The additional demand meant additional increase during the upside.  These borrowers were recently removed from the market in 2007 as more traditional, risk aversive underwriting has been instituted.

-News media - This is likely the largest impact more recently as national and local media constantly hit the airwaves from CNN to local news media to do a surface sound bit of how bad the market it and cite which cities have the largest declines.  Even decent markets have gone down in some of the most desirable, upscale portions of the Valley.

-Refusing to lend - Many banks, especially in the luxury or jumbo market are no longer lending.  As money is harder to come by and liquidity has been increased with the auctioning of federal funds and low interest rates, many banks are relending money on credit cards or other products.

-Low yields on CD's - in a matter of 3-4 months, short term CD's went from 5.5% to around 3% as banks pay less. 

-Rates rising again - Rates just went up.  They went down to 5.5% for a 30 year note for the bank's prime or best customer and there are already at 6% or higher again.  This is still a great price and at or near historical 30-40 year lows.

-Unemployment - This is the prime concern lately, the highest uptick in lost jobs since 1986 was just noted in recent government reports.  Local reports are not out yet, but the general Phoenix area typically outperforms the national numbers.  Financial services and construction have been the hardest hit with many local and national builders either in bankruptcy or taking massive losses.

-Real Estate Brokerages - many of these are in bankruptcy including one large national chain that has several locations.  Additionally, another large national chain of brokerage just went out of business that had at least 14 locations.  Putting a desperate seller such as a corporate entity and a desperate real estate company has yielded some of the poorest plummeting list prices ever.  Even when properties sell quickly for cash or

-Short sales - In order for a short sale to occur, the borrower has to prove that they have no money to make payments (financial hardship), no way to pay the difference and the property may need to be in foreclosure.  It is odd that so many of these are approved - they just took the loan out in the past 12-36 months and there hasn't been any change of employment.

-Legislation - The local State of Arizona has legislation to license loan officers. The horses are already out of the barn, but Arizona was moving off the radar for mortgage fraud to making it's way back to the top 10 - again!  It is reported that the head of some sort of committee is blocking legislation and not cooperating in order to get the legislation passed.  California and Colorado already passed some sort of 'clean up' laws from the current mess.  As it stands, no licensing, education, fiduciary or any other requirements currently are required by Arizona despite such action being recommended by the governor at State of the State address.

-New CEO's - Have you seen a national mortgage company that doesn't have a new CEO?  Unlikely.  Many threw caution and risk management to the wind.  More risk averse, prudent managers have been called in to run companies which may rock the boat a little.  Citigroup, the nations largest with over 2.2 trillion in assets, is planning to get rid of 500 billion associated with residential lending, etc.  This company was reported/predicted to take on 18 billion in write downs and losses when the year of 2008 started.  They are already up to 35 billion or so and may have another 15 billion in exposure according to recent article.  They have a new CEO taking care of the shop.  Remember when they would have 100% financing with negative amortization and the market was invincible - anyone who could bought as many properties as possible?  The market was perceived as invincible since there really was no liquidity risk at all.  Similarly, banks gave loans to people soley based on the fact that the market is going up on refinances despite the fact that they have no way to repay the loan.  Remember that? This market is the unraveling of that.  They all wanted more, more and to increase market share when in reality they were triggering an enormous, widespread financial disaster and real estate depression. If Citigroup sells of a portion of their business (500 billion), either JPMorgan or Bank of American will be the largest bank at that point.

-Fuel prices over $4/gallon going to $5- This does some have impact on the market.  Paying twice the price for a necessity such as fuel does impact the extent and amount that a buyer has to put towards housing.

Whew...these are just a few aspects of the market.  One more aspect is condition.  Having managed at a bank, looking at a 460 to 500 credit bureau score isn't pretty - typically riddled with judgements, BK, defaults and other concerns.  Similarly, as an appraiser, when entering these properties they aren't pretty either.  Individuals who have a history of not maintaining things appear, for the most part, not to maintain and even destroy properties.  Oddly enough, they may not have had much of their own money into a property and now the bank has to absorb damage, costs of sale and the loss in value due to the decline in property prices since everyone did the same thing - lent money on the risky side.  Many do damage to the properties on their way out despite the prescribed consequence for non-payment.  Ironically, banks want buyers to purchase "as is" with a property in now fair condition (which is a catch 22).  The next bank won't lend on it.

There is a solution in the market with a high level of limitation.  Try the FHA 203K program...480-706-6222 BBaca Engineering starts it all off.  The report and costs are then handed to the appraiser.  The bank or lending professional coordinates all of this.  This is just one solution of a property that has been heavily discounted for damage in an area where the repaired property has sufficient market value denoting feasibility.

Just a quick note. Commercial real estate markets are still reasonably strong, but they are affected; Increases in vacancies for office and retail were noted more recently.  Additionally, there are some larger down payment requirements for multifamily projects based on market participant information.

If you have questions or would like to see a blog item, please call 480-831-0002 or post your comments.