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For information about luxury homes in Los Angeles County, Orange County and San Diego County, call Bob Cumming of Keystone Group Properties at 310-496-8122. Keystone Group Properties services buyers and sellers of Southern California real estate La Jolla and Oceanside to San Juan Capistrano, Dana Point, Laguna Beach, Newport Beach homes and Santa Monica properties.

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

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

For information about distinguished Southern California homes in coastal areas of Orange County, San Diego County and Los Angeles County as well as Beverly Hills luxury real estate, call Bob Cumming of Keystone Group Properties at 310-496-8122.

Fannie-Freddie Short-Sale Program May Hurt Sellers’ Credit Scores

Homeowners who qualify for the Fannie-Freddie short-sale program could see their credit scores fall, even when they’ve made timely payments on their loans.

By Kenneth R. Harney

WASHINGTON — With generous new guidelines from Fannie Mae and Freddie Mac likely to stimulate large numbers of short sales by underwater homeowners, what effect will the sales have on the sellers’ credit scores?

It’s a crucial question, because short sales typically cause FICO scores to plummet, sometimes 150 points or more. This, in turn, complicates sellers’ credit capabilities for years and makes additional borrowing — whether for auto loans, credit cards or new mortgages — tougher and more expensive.

The issue arises now because Fannie Mae and Freddie Mac — the dominant sources of home loan funds — recently outlined plans to approve short sales for underwater borrowers who are current on their loan payments, provided that they face an imminent hardship. Although the numbers of participants in the plan won’t be known for months, the two companies combined have about 3.7 million underwater mortgages in their portfolios on which borrowers are making their payments on time, according to federal regulators.

Short sales traditionally have been associated with extended periods of delinquency by borrowers. The technique itself — in which the lender agrees to accept less than what’s owed and the property is sold — usually has been employed as an alternative to foreclosure.

As a result, FICO credit scores — the major risk predictive tool used in the mortgage industry — have severely penalized borrowers who opt for short sales. VantageScore, the FICO rival created by the three national credit bureaus, also hits short sellers with triple-digit point losses.

In a recent blog post, Frederic Huynh, FICO’s senior scientist, said statistical reviews of short sellers by the company concluded that they “represent a high degree of risk” to lenders. More than 55% of short sellers in a sample of borrowers from 2007 to 2009 went on to later default on other credit accounts after completing the sale transaction. This ranks them in the same “heavyweight” risk class as people who have been foreclosed upon, filed for bankruptcy, or had a tax lien or collection account.

But hold on. Won’t underwater homeowners who qualify for the upcoming short-sale program be fundamentally different? Won’t they have solid mortgage payment histories despite being underwater? Why should they have to take the same heavy hits to their scores earned by people who didn’t pay their mortgage for months on end?
Good questions, but it appears that these sellers won’t get the break they deserve. The scoring system, credit experts say, isn’t set up to recognize — or properly report — short sales by on-time mortgage customers to the national credit bureaus. And the credit score companies aren’t planning to make any changes to the penalties their models assign to people who participate in short sales.

Anthony Sprauve, a spokesman for Fair Isaac Corp., developer of the FICO score, says that in general, when a loan is paid off for less than the full balance, it is “classified as a severe negative item” by the FICO scoring model. And “there are currently no plans to change,” he added.

Sarah Davies, senior vice president for research and analytics for VantageScore Solutions, said her company probably won’t modify its scoring algorithms either, despite the fact that the seller was not delinquent and came to a mutually satisfactory resolution with the lender.

Terry Clemans, executive director of the National Credit Reporting Assn., an industry trade group, says this is all inherently unfair for borrowers who have continued to make timely payments on their loans. Crushing them with deep credit score penalties “doesn’t reflect the fact that these people are actually excellent credit risks. They simply encountered an extraordinary situation” — namely, the national home value bust — which put them underwater.

A Fannie Mae spokesman, Andrew Wilson, said his company has no control over how short sales — whether of people who paid on time or those who didn’t — are scored. But when borrowers do a short sale rather than force the lender to foreclose, Fannie rewards them: They are potentially eligible for a new mortgage again within two years of a short sale. People who go to foreclosure, by contrast, may not be able to get a new Fannie loan for as long as seven years.

Bottom line: If you’re underwater and plan to use the new Fannie-Freddie short-sale program this year, don’t bank on any special favors when it comes to your credit score. It looks as if you’re going to take a big hit, despite all your on-time payments.