Short sales - where a lender agrees to take less than it's owed on a mortgage - are rising sharply. Here's how you can profit.
By Joe Light, Money Magazine staff reporter
(Money Magazine) -- When Brian Gavitt, a physician, and his wife Gayleen, a stay-at-home mom, started to eye homes in Sacramento last winter, they knew they were looking in the hardest-hit areas of the housing bust. So the couple, who were relocating from Lansing, figured they could land a fantastic bargain in no time at all.
The part about the bargain turned out to be true. The Gavitts bought a five-bedroom house in the upscale Natomas Park neighborhood ("Even now, you don't see FOR SALE signs up anywhere," says Gayleen.) And it was a steal at $300,000, a full $200,000 less than they would have paid just two years ago.
The amount of time it took to land the deal was another story. It was more than six months from when the Gavitts first saw their dream home to the moment they held the keys in their hands. The reason: The home they bought was a short sale.
Not along ago, few people had even heard of a short sale, which occurs when the bank agrees to discount the loan balance for a seller who owes more on his mortgage than the home is currently worth.
If you're in the market for a home today, you're almost guaranteed to be looking at some short sales. Nationwide, 14% of homeowners are currently underwater on their mortgages, calculates real estate website Zillow.com. And in many areas, it's far more: In the Gavitts' zip code, for example, over half of homeowners would owe more than their home is worth if they sold today, calculates Dee Schwindt, the Gavitts' realtor.
The good news is that short sellers are likely to still be living in the home and some may even be current on their payments. That means these aren't the run-down, distressed properties that you often find among foreclosures; in fact, there's a good chance that some of the most deluxe homes for sale in your market are underwater.
Before you get too excited about buying a short sale, know that they generally aren't, well, short. For the sale to go through, the seller's lender must approve the price and agree to take the shortfall as a loss. That extra step can cause the process to drag on three times as long as a normal home sale.
But as the Gavitts discovered, the hassles can be well worth it. Some buyers and realtors don't want to deal with short sales, leaving many choice homes with very few bidders. So if you're willing to brave the intricacies of the process, you'll be far more likely to land the home you always wanted. The key to snagging a good deal is knowing how to avoid the land mines.
Know what you're getting into. In a short sale, you are dealing with several parties: the sellers, their agent and the sellers' lender. That's why a short sale can take anywhere between two and six months to execute, compared with about 30 days for a typical sale. Though many banks are willing to take a loss on a mortgage in a short sale if it means avoiding an even bigger loss in a foreclosure, with so many owners trying to unload properties, the lender's negotiators are flooded with short-sale offers. So if you're moving or selling another property, keep in mind that you'll likely need to budget for a few months' worth of rental payments so you have somewhere to live in the interim.
Find the right pro. Lenders often make realtors who work on short sales take a hit on their commission, so some brokers may be loath to show you the listings. But don't even think about going solo. These deals take a lot of work and persistence, says Loni Parmelly, author of Success in Short Sales. Before you sign up with an agent, ask him how many short sales he's closed. If he hasn't done at least two, find someone more experienced.
Weed out candidates. In most cities, home listings will indicate in the description whether the property is a short sale. Ideally, you want to knock off ones that come with extra complexities. If possible, pass on any home that has more than one lien against it; having to negotiate loans with two lenders can greatly increase the amount of time it takes to complete the deal. Also avoid homes where the seller has other offers. That's because if another offer is pending, the seller's agent isn't likely to even submit yours for approval until the first one is rejected, meaning you'll have to wait for another negotiation to play out before you even get a chance.
Set the right price. The first step is to have your agent submit your offer to the seller. Don't just rely on the current list price to come up with your initial bid, says Bill Richardson, a district sales manager for the Keyes Co. Realtors in Boca Raton, Fla. The seller's agent may have far underpriced it in hopes of attracting buyers, but the bank likely won't accept a lowball offer. Ask your agent to determine the home's fair market value by searching comparable sales in the area, with an emphasis on other short sales and foreclosures (or get a rough estimate yourself at zillow.com). If the fair market value is lower than the list price, set your offer 10% lower than that.
At this point, you'll also want to get pre-approval for a mortgage; many banks won't even consider your offer if you don't have one, says Schwindt.
Protect yourself. Next, the seller's agent will submit your offer to the seller's lender. At this point, you'll be asked to sign a sales contract. See if the lender will agree to pick up all closing costs as part of the contract, says author Parmelly. Also ask your realtor to specify that you won't do an appraisal or inspection of the property until the offer is approved. That way you won't have to shell out hundreds of dollars until you know you realistically have a good chance of getting the home.
Finally, though most lenders will require you to make some kind of deposit along with the contract, don't put down more than $3,000 before your bid is accepted. That will give you room to put offers on other homes or even to pull out of the sale if it drags on for too long.
Be a pain in the neck. After your offer is submitted to the lender, you're likely to hear nothing for weeks, if not months. This is no time to relax. Call your agent at least once a week, and make sure the seller's agent is contacting the bank's negotiator nearly every day.
"These negotiators may have 400 files on their desk. They'll want to get rid of the squeaky wheels," says Parmelly, who worked as a loan negotiator for lenders for 16 years. To help the seller's realtor in her negotiations with the lender, it's a good idea to have your agent show her which comparable homes you used to arrive at your number.
If the clock keeps ticking and you're reaching the end of your rope, try playing hardball. After months, the lender the Gavitts negotiated with was still dragging its feet and their pre-approved loan rate was about to expire. "We said, 'We need an answer by Friday or we walk,' " Gayleen says. The bank responded by week's end.
Keep your eye on the market. When the bank finally sends its counter-offer, use it as a guideline rather than an ultimatum. Most of the time, the lender's number is based on its own research, that of a local realtor it hires and the outstanding loan balance. Usually its goal is to sell for at least 90% of the home's value, says Amy Bohutinsky, a spokes-person for Zillow.com.
The lender's offer may not be what you'd hoped for, but don't despair: You have a chance to counter. If the market has been flat since your initial bid, try for 5% to 10% less than the bank's number. If the market has been sinking rapidly, however, you may be able to prove that the home's value has shrunk further and offer even less. Once you have the lender's ear, the new offer should take less time to process.
Despite all the legwork and wait, the Gavitts are thrilled with their new home. "I'm glad people are turned off by short sales," says Brian. "It just means more choices for the rest of us."
Thursday, May 14, 2009
Wednesday, May 6, 2009
8 Signs of Hope for the Economy
by Beth Kowitt
provided byCNNMoney.com
Are we on the brink of a rebound, or is it a false spring? Fortune looks at the evidence for an imminent recovery.
Is the economy looking up, or at least bottoming out? Lately there has been much talk about "glimmers of hope," in President Obama's words, and "green shoots," a phrase du jour used by the likes of Fed Chairman Ben Bernanke.
Meanwhile, many economists have warned about a false spring, pointing to numbers that are still getting worse, like the unemployment rate. Fortune takes a closer look at the upbeat news to assess whether how strong a case they make for an imminent recovery.
1. Housing Starts
The government reported that the overall number of housing starts fell in March, but those for single-family homes during the month came in unchanged from the February figure of 358,000.
IHS Global Insight noted that this suggests single-family home construction may be stabilizing and is "testing the bottom."
2. The Stock Market
The S&P 500 was up 9.4% in April, its biggest monthly rally since March 2000. The Wilshire 5000 Total Market Index ended the month at 8,962.96, up 849.85, or 10.48%. This is the best monthly return since December 1991, when the index was up 10.72%.
"The initiatives of the federal government and some of the improvements in the credit markets are making investors more confident," said Thomas Cowhey, chief investment strategist at Hirtle Callaghan.
3. Consumer Confidence
Preliminary figures for the Conference Board's Consumer Confidence Index showed a jump of more than 12 points during April, to 39.2. The reading, which measures consumer views on the economy, beat analyst expectations and was the highest so far in 2009.
Lynn Franco, director of the organization's research center, attributed the rise in confidence to "significant improvement in the short-term outlook."
4. Single-Family Home Prices
The S&P/Case-Shiller Home Price Indices showed that while 20-city and 10-city Composite Home Price figures declined through February 2009 (down 18.6% and 18.8%, respectively, from a year ago), for the first time in 16 months the annual decline did not set a new record.
While it signals that the market may be showing some stabilization, or at least what Chairman of the Index Committee David Blitzer called "deceleration in the rate of decline," Blitzer warned that we "need a few more months of data before we can determine if home prices are finally turning around."
Meanwhile, the Pending Home Sales Index rose for the second straight month in March and was up more than 1% over the year-ago figure. The index from the National Association of Realtors (NAR) increased 3.2% during the month, to 84.6%.
"This increase could be the leading edge of first-time buyers responding to very favorable affordability conditions and an $8,000 tax credit," wrote Lawrence Yun, the NAR chief economist.
5. Earnings
The collapse in profits may be nearly played out. As of the last day in April, the 341 S&P 500 companies that had reported earnings for the first quarter were on average about 2% below estimates, according to Howard Silverblatt, senior index analyst at Standard & Poor's. Silverblatt says the results are overall "not good but definitely not bad" and show that "deterioration has slowed down."
Financial companies reported surprisingly strong numbers. But we can't count on an earnings turnaround for many months, says Silverblatt, who won't consider the numbers to show definitive proof of improvement until fourth-quarter results are in.
6. Jobless Benefit Claims
While unemployment figures are expected to rise still further, there was a signs of hope in the Unemployment Insurance Weekly Claims Report for the week ending April 25. The Department of Labor reported that seasonally adjusted initial claims for unemployment aid fell by 14,000 to 631,000.
"The past few weeks' claims data are beginning to look increasingly like a peak," wrote Ian Shepherdson of High Frequency Economics.
7. New Orders and Exports
Orders are starting to pick up. While reports from the Institute for Supply Management showed that the manufacturing sector failed to grow for the 15th straight month in April, its New Orders Index increased six percentage points to 47.2%, the highest level since August. The New Exports Orders Index increased 5 percentage points, to 44%.
"While this is a big step forward, there is still a large gap that must be closed before manufacturing begins to grow once again," said Norbert Ore, chair of the institute's survey committee, in a statement. "This is definitely a good start for the second quarter."
8. Credit Markets
Banks are starting to trust one another again. In May, the three-month London interbank offered rate (Libor), a benchmark for interbank loans, fell below 1% for the first time on record. That was down from 1.16% a month ago and 2.51% six months prior.
John Ewan, director of the British Bankers' Association, which sets the rate, told Fortune in an email that "the continued easing of the rates demonstrates that liquidity and confidence are returning to the wholesale markets."
provided byCNNMoney.com
Are we on the brink of a rebound, or is it a false spring? Fortune looks at the evidence for an imminent recovery.
Is the economy looking up, or at least bottoming out? Lately there has been much talk about "glimmers of hope," in President Obama's words, and "green shoots," a phrase du jour used by the likes of Fed Chairman Ben Bernanke.
Meanwhile, many economists have warned about a false spring, pointing to numbers that are still getting worse, like the unemployment rate. Fortune takes a closer look at the upbeat news to assess whether how strong a case they make for an imminent recovery.
1. Housing Starts
The government reported that the overall number of housing starts fell in March, but those for single-family homes during the month came in unchanged from the February figure of 358,000.
IHS Global Insight noted that this suggests single-family home construction may be stabilizing and is "testing the bottom."
2. The Stock Market
The S&P 500 was up 9.4% in April, its biggest monthly rally since March 2000. The Wilshire 5000 Total Market Index ended the month at 8,962.96, up 849.85, or 10.48%. This is the best monthly return since December 1991, when the index was up 10.72%.
"The initiatives of the federal government and some of the improvements in the credit markets are making investors more confident," said Thomas Cowhey, chief investment strategist at Hirtle Callaghan.
3. Consumer Confidence
Preliminary figures for the Conference Board's Consumer Confidence Index showed a jump of more than 12 points during April, to 39.2. The reading, which measures consumer views on the economy, beat analyst expectations and was the highest so far in 2009.
Lynn Franco, director of the organization's research center, attributed the rise in confidence to "significant improvement in the short-term outlook."
4. Single-Family Home Prices
The S&P/Case-Shiller Home Price Indices showed that while 20-city and 10-city Composite Home Price figures declined through February 2009 (down 18.6% and 18.8%, respectively, from a year ago), for the first time in 16 months the annual decline did not set a new record.
While it signals that the market may be showing some stabilization, or at least what Chairman of the Index Committee David Blitzer called "deceleration in the rate of decline," Blitzer warned that we "need a few more months of data before we can determine if home prices are finally turning around."
Meanwhile, the Pending Home Sales Index rose for the second straight month in March and was up more than 1% over the year-ago figure. The index from the National Association of Realtors (NAR) increased 3.2% during the month, to 84.6%.
"This increase could be the leading edge of first-time buyers responding to very favorable affordability conditions and an $8,000 tax credit," wrote Lawrence Yun, the NAR chief economist.
5. Earnings
The collapse in profits may be nearly played out. As of the last day in April, the 341 S&P 500 companies that had reported earnings for the first quarter were on average about 2% below estimates, according to Howard Silverblatt, senior index analyst at Standard & Poor's. Silverblatt says the results are overall "not good but definitely not bad" and show that "deterioration has slowed down."
Financial companies reported surprisingly strong numbers. But we can't count on an earnings turnaround for many months, says Silverblatt, who won't consider the numbers to show definitive proof of improvement until fourth-quarter results are in.
6. Jobless Benefit Claims
While unemployment figures are expected to rise still further, there was a signs of hope in the Unemployment Insurance Weekly Claims Report for the week ending April 25. The Department of Labor reported that seasonally adjusted initial claims for unemployment aid fell by 14,000 to 631,000.
"The past few weeks' claims data are beginning to look increasingly like a peak," wrote Ian Shepherdson of High Frequency Economics.
7. New Orders and Exports
Orders are starting to pick up. While reports from the Institute for Supply Management showed that the manufacturing sector failed to grow for the 15th straight month in April, its New Orders Index increased six percentage points to 47.2%, the highest level since August. The New Exports Orders Index increased 5 percentage points, to 44%.
"While this is a big step forward, there is still a large gap that must be closed before manufacturing begins to grow once again," said Norbert Ore, chair of the institute's survey committee, in a statement. "This is definitely a good start for the second quarter."
8. Credit Markets
Banks are starting to trust one another again. In May, the three-month London interbank offered rate (Libor), a benchmark for interbank loans, fell below 1% for the first time on record. That was down from 1.16% a month ago and 2.51% six months prior.
John Ewan, director of the British Bankers' Association, which sets the rate, told Fortune in an email that "the continued easing of the rates demonstrates that liquidity and confidence are returning to the wholesale markets."
Obama Outlines Spending Plans
Obama Outlines Spending Plans
AFFORDABLE HOUSING FINANCE
BY BARRY G. JACOBS
President Barack Obama holds a prime-time news conference March 24 to increase popular support for his $3.6 trillion budget and economic recovery plan. (Photo by Getty Images)
President Barack Obama has outlined a fiscal 2010 budget that provides more funding for federal housing programs, including $1 billion for the national Affordable Housing Trust Fund. Overall discretionary Department of Housing and Urban Development (HUD) funding would be up about $6 billion, to $47.5 billion.
The proposed appropriation for the trust fund would help fill the gap resulting from the suspension of assessments on Fannie Mae and Freddie Mac, which were supposed to be its primary funding source.
The budget outline also calls for increased funding for Sec. 8 tenant-based and project-based assistance, though it doesn’t specify amounts.
In addition, the administration plans to introduce legislative reforms to the voucher program to help fully utilize available funding and ease the administrative burdens on public housing authorities.
The administration will also request $4.5 billion to fully fund the Community Development Block Grant (CDBG) program in fiscal 2010, with legislation to revise the funding formula to better target assistance to distressed areas and promote sustainable and economically viable communities.
According to the outline, the budget will also provide funds to HUD to combat mortgage fraud and predatory lending and strengthen fair housing enforcement. In addition, a joint HUDEnergy Department innovation fund would support the creation of an energy- efficient housing market, including the retrofitting of older buildings.
Congress completes work on ’09 funding, approves stimulus bill
While preparing to deal with funding for the federal government in 2010, Congress also completed work on fiscal 2009 appropriations and approved a mammoth economic stimulus bill that includes billions of dollars for housing.
The omnibus 2009 appropriations measure (H.R. 1105) includes $41.5 billion in discretionary budget authority for HUD. The department had been operating on a continuing resolution.
The bill provides $16.8 billion for Sec. 8 tenant-based assistance, including $15 billion for renewals, and $7.1 billion for Sec. 8 project-based aid, with $6.9 billion for renewals.
For public housing, the bill includes $2.4 billion for the capital fund, $4.5 billion for the operating fund, and $120 million for the HOPE VI program for the revitalization of severely distressed housing. Other major HUD funding provisions include $3.9 billion for community development, with $3.6 billion allocated to formula CDBGs; $1.8 billion for HOME; $1.7 billion for homeless assistance; $765 million for Sec. 202 housing for the elderly; $250 million for Sec. 811 housing for the disabled; $645 million for Indian housing block grants; and $310 million for housing opportunities for persons with AIDS.
The bill sets commitment limits of $315 billion for the Federal Housing Administration Mutual Mortgage Insurance Fund; $45 billion for the General and Special Risk account, which insures multifamily mortgages; and $300 billion for Ginnie Mae mortgagebacked securities.
For rural housing, the funding bill provides $69.5 million for Sec. 515 rural rental housing loans, $129.1 million for Sec. 538 guaranteed multifamily loans, $902.5 million for rural rental assistance, $1.1 billion for Sec. 502 direct home loans, and $6.2 billion for Sec. 502 guaranteed loans.
The $787 billion economic stimulus bill (H.R. 1), the American Recovery and Reinvestment Act, includes two measures to address the sagging low-income housing tax credit equity market.
One provision allows state housing finance agencies to exchange a portion of their tax credit authority—up to 40 percent of their 2009 credits and 100 percent of their unused 2008 credits and returned credits—for Treasury Department grants equal to 85 percent of the 10-year credit amount. In effect, the swap would allow state agencies to provide the equivalent of an equity investment at a price of $0.85 per tax credit dollar. The grants can be used for projects with or without tax credits, but tax credit program rules will apply in either case.
The second provision gives HUD $2.25 billion in tax credit assistance funds to be allocated to state agencies through the HOME funding formula for aid to projects receiving tax credit allocations in 2007, 2008, and 2009. The stimulus bill also includes $2 billion for Sec. 8 project- based assistance to support 12-month contract renewals; $1.5 billion for homelessness prevention and re-housing efforts; $4 billion in public housing capital funds; $2 billion to be allocated through the Neighborhood Stabilization Program to redevelop foreclosed and abandoned homes; $1 billion for CDBGs; $510 million for Indian housing block grants; and $250 million for green investments and energy retrofitting of HUD-assisted housing.
Foreclosure crisis efforts continue
Outside of the budget and appropriations process, the home mortgage foreclosure crisis continues to dominate housing-related activity in Washington, with both the administration and Congress pushing relief measures.
The administration’s program includes the refinancing of mortgages held by Fannie and Freddie that don’t exceed 105 percent of the current property value and the modification of other loans where borrowers are facing potential foreclosure. The Treasury Department announced standardized guidelines for modifications, with eligibility limited to loans originated on or before Jan. 1, 2009, with principal balances up to the high-cost conforming loan limit, which is $729,750 for a one-family dwelling.
AFFORDABLE HOUSING FINANCE
BY BARRY G. JACOBS
President Barack Obama holds a prime-time news conference March 24 to increase popular support for his $3.6 trillion budget and economic recovery plan. (Photo by Getty Images)
President Barack Obama has outlined a fiscal 2010 budget that provides more funding for federal housing programs, including $1 billion for the national Affordable Housing Trust Fund. Overall discretionary Department of Housing and Urban Development (HUD) funding would be up about $6 billion, to $47.5 billion.
The proposed appropriation for the trust fund would help fill the gap resulting from the suspension of assessments on Fannie Mae and Freddie Mac, which were supposed to be its primary funding source.
The budget outline also calls for increased funding for Sec. 8 tenant-based and project-based assistance, though it doesn’t specify amounts.
In addition, the administration plans to introduce legislative reforms to the voucher program to help fully utilize available funding and ease the administrative burdens on public housing authorities.
The administration will also request $4.5 billion to fully fund the Community Development Block Grant (CDBG) program in fiscal 2010, with legislation to revise the funding formula to better target assistance to distressed areas and promote sustainable and economically viable communities.
According to the outline, the budget will also provide funds to HUD to combat mortgage fraud and predatory lending and strengthen fair housing enforcement. In addition, a joint HUDEnergy Department innovation fund would support the creation of an energy- efficient housing market, including the retrofitting of older buildings.
Congress completes work on ’09 funding, approves stimulus bill
While preparing to deal with funding for the federal government in 2010, Congress also completed work on fiscal 2009 appropriations and approved a mammoth economic stimulus bill that includes billions of dollars for housing.
The omnibus 2009 appropriations measure (H.R. 1105) includes $41.5 billion in discretionary budget authority for HUD. The department had been operating on a continuing resolution.
The bill provides $16.8 billion for Sec. 8 tenant-based assistance, including $15 billion for renewals, and $7.1 billion for Sec. 8 project-based aid, with $6.9 billion for renewals.
For public housing, the bill includes $2.4 billion for the capital fund, $4.5 billion for the operating fund, and $120 million for the HOPE VI program for the revitalization of severely distressed housing. Other major HUD funding provisions include $3.9 billion for community development, with $3.6 billion allocated to formula CDBGs; $1.8 billion for HOME; $1.7 billion for homeless assistance; $765 million for Sec. 202 housing for the elderly; $250 million for Sec. 811 housing for the disabled; $645 million for Indian housing block grants; and $310 million for housing opportunities for persons with AIDS.
The bill sets commitment limits of $315 billion for the Federal Housing Administration Mutual Mortgage Insurance Fund; $45 billion for the General and Special Risk account, which insures multifamily mortgages; and $300 billion for Ginnie Mae mortgagebacked securities.
For rural housing, the funding bill provides $69.5 million for Sec. 515 rural rental housing loans, $129.1 million for Sec. 538 guaranteed multifamily loans, $902.5 million for rural rental assistance, $1.1 billion for Sec. 502 direct home loans, and $6.2 billion for Sec. 502 guaranteed loans.
The $787 billion economic stimulus bill (H.R. 1), the American Recovery and Reinvestment Act, includes two measures to address the sagging low-income housing tax credit equity market.
One provision allows state housing finance agencies to exchange a portion of their tax credit authority—up to 40 percent of their 2009 credits and 100 percent of their unused 2008 credits and returned credits—for Treasury Department grants equal to 85 percent of the 10-year credit amount. In effect, the swap would allow state agencies to provide the equivalent of an equity investment at a price of $0.85 per tax credit dollar. The grants can be used for projects with or without tax credits, but tax credit program rules will apply in either case.
The second provision gives HUD $2.25 billion in tax credit assistance funds to be allocated to state agencies through the HOME funding formula for aid to projects receiving tax credit allocations in 2007, 2008, and 2009. The stimulus bill also includes $2 billion for Sec. 8 project- based assistance to support 12-month contract renewals; $1.5 billion for homelessness prevention and re-housing efforts; $4 billion in public housing capital funds; $2 billion to be allocated through the Neighborhood Stabilization Program to redevelop foreclosed and abandoned homes; $1 billion for CDBGs; $510 million for Indian housing block grants; and $250 million for green investments and energy retrofitting of HUD-assisted housing.
Foreclosure crisis efforts continue
Outside of the budget and appropriations process, the home mortgage foreclosure crisis continues to dominate housing-related activity in Washington, with both the administration and Congress pushing relief measures.
The administration’s program includes the refinancing of mortgages held by Fannie and Freddie that don’t exceed 105 percent of the current property value and the modification of other loans where borrowers are facing potential foreclosure. The Treasury Department announced standardized guidelines for modifications, with eligibility limited to loans originated on or before Jan. 1, 2009, with principal balances up to the high-cost conforming loan limit, which is $729,750 for a one-family dwelling.
Friday, May 1, 2009
Growing strong
By J.D. STETSON, News-Record Writer jstetson@gillettenewsrecord.net
Juan Peraltz is a family man, a small business owner and, starting this week, a risk-taker.
Peraltz opened Maria’s Mexican Restaurant in 2003 to help pay for his son’s college tuition, and every member of his family has worked there since.
The business has grown. It’s time to expand.
When the former Popeyes Chicken and Biscuits building came available after sitting vacant for more than a year, Peraltz jumped at the opportunity to open a second restaurant. He didn’t have the money to buy the building, but did have enough to lease it.
After much remodeling, his will be the first this week of several Gillette businesses that are completing some type of expansion plans.
Building and expanding
New small businesses created in the fires of the recession and the expansion of existing businesses amid a national credit crisis shows Gillette seems to be weathering the economic storm.
Commercial expansion is seeing growth rather than new development of commercial property, said Michael Surface, a senior planner with the City of Gillette.
New commercial construction has been down from previous quarters. Surface is now trying to determine how many businesses are expanding.
“If local business can expand, they’re actually adding more services to the community,” Surface said.
If existing businesses continue to grow and change during a credit crisis, Gillette is certainly in a better position than the rest of the country, said Katie Allen, community development director.
“It may not be the boom it was two years ago, but it’s still encouraging,” Allen said.
- Gillette had six new commercial permits issued in the first quarter of 2009, according to the city’s quarterly development summary.
- About 25 new projects were issued permits since the beginning of 2007.
Surface and Allen are optimistic that there will be a trend toward new commercial projects in the next year and that the existing trend for expansion likely will continue.
“Just in the last month, we had three different developers come to Gillette already just to feel out the economy. That’s very encouraging,” Allen said.
The city’s investment in infrastructure during the past few years, which includes the $16 million in state loans to begin the process to build a new 42-mile water pipeline, and the near completion of power plants near the city support the optimistic assertion that there will be more growth.
More infrastructure encourages businesses to continue to expand, Surface said.
House construction
While home building has slowed and some out-of-town contractors are pulling out, there still are many projects in the pipeline for completion.
- There were 148 housing permits issued in the first three months of 2009.
- The number is up from 98 permits during the first three months of 2008.
- There were 128 permits issued for the same period in 2007.
About 1,981 housing permits still are in the pipeline. Many are in the final plat stage. They are a result of the subdivision activity that took place at the end of 2005 through 2007, Surface said.
About 477 of the units are in the final plat review stage and include units for Iron Horse, Remington Estates, Bittercreek, Sawgrass and Legacy Ridge subdivisions.
The city still has a need for family housing based on the city’s very low vacancy rates for apartments and manufactured homes.
- The rate for apartments has gone up from .1 percent in the fourth quarter of 2008 to 1.4 percent at the end of March.
- Manufactured homes increased from 5.1 percent to 5.3 percent.
The city contends that a vacancy rate for apartments of 5 percent would create a good balance. When numbers are low, there’s a shortage.
It’s difficult to attract developers of multi-family dwellings to Gillette because of the high land cost. Developers also want to make sure the economy can sustain it.
The housing market is still going strong, said Jeff Riesland, Century 21 Real Estate Associates agent.
Many people who rented a home are now able to afford to buy a home after a price correction took place earlier in the year.
Loans still are being made for many of the buyers who qualify for rural development loans. They also are taking advantage of the low-interest rates.
The real estate forecast looks good going into the spring and the summer, Riesland said. He added that his office has had numerous calls on commercial property in the past few months.
Economic development
Bringing new business to Gillette is Campbell County Economic Development Corp.’s goal.
The agency conducted a retail market analysis in 2005 that identified the characteristics of the city that are meaningful to retail businesses.
Gillette has a lot of “bleed out” of people who spend money in other communities such as Rapid City, S.D., and Casper.
The study gave a snapshot of what the retail picture was like and also a few items that needed work. It didn’t give a long-term strategy.
The agency will now send representatives to meet with various commercial developers with the International Council of Shopping Centers to introduce them to Gillette.
“We’re meeting with them and letting them know that the whole country is not in a recession,” said Susan Jerke, interim executive director.
The agency also has applied for a United States Department of Agriculture grant to help them revamp the original study and produce marketing plans and contacts.
Most businesses are skeptical of Gillette because of its low population numbers and its mineral-based economy that doesn’t have a lot of diversity.
The draw to Gillette from surrounding communities in Crook and Johnson counties and the rest of Campbell County places the city on the threshold needed for most businesses to move in — roughly 50,000 people.
Work force also is an issue that is improving in the county. More people come to Gillette each day who are drawn to different fields of work or the latest education opportunities.
The agency also is working with the Campbell County Chamber of Commerce and the city to help retain and expand existing businesses.
While the agency works to build Gillette’s retail, there are others like the Prime Rib, Subway, Smith’s and Maria’s that continue to take risks and continue to expand.
“That’s just another example of businesses who are here committing their financial resources to expand, showing faith in the economic climate that is here in Campbell County,” Surface said.
Ready to open
As for Peraltz, he’s nervous and he’s cautious.
Seeing what happened to the former chicken business that once was housed in his new restaurant has taught him that even with a new building he must be prepared for what’s to come.
For the past several weeks, he’s been working to re-create the former fast-food place as a sit-down lunch and dinner restaurant. He’s remodeled the kitchen, installed a smoker to cook prime rib and rotisserie chicken and he’s applied for a liquor license.
At 10 a.m. Wednesday, the doors to Chicos Restaurant will open on Boxelder Road near Home Depot, and he’ll be put to the test.
“It’s ready or not, we must, we have to go,” Peraltz said.
Juan Peraltz is a family man, a small business owner and, starting this week, a risk-taker.
Peraltz opened Maria’s Mexican Restaurant in 2003 to help pay for his son’s college tuition, and every member of his family has worked there since.
The business has grown. It’s time to expand.
When the former Popeyes Chicken and Biscuits building came available after sitting vacant for more than a year, Peraltz jumped at the opportunity to open a second restaurant. He didn’t have the money to buy the building, but did have enough to lease it.
After much remodeling, his will be the first this week of several Gillette businesses that are completing some type of expansion plans.
Building and expanding
New small businesses created in the fires of the recession and the expansion of existing businesses amid a national credit crisis shows Gillette seems to be weathering the economic storm.
Commercial expansion is seeing growth rather than new development of commercial property, said Michael Surface, a senior planner with the City of Gillette.
New commercial construction has been down from previous quarters. Surface is now trying to determine how many businesses are expanding.
“If local business can expand, they’re actually adding more services to the community,” Surface said.
If existing businesses continue to grow and change during a credit crisis, Gillette is certainly in a better position than the rest of the country, said Katie Allen, community development director.
“It may not be the boom it was two years ago, but it’s still encouraging,” Allen said.
- Gillette had six new commercial permits issued in the first quarter of 2009, according to the city’s quarterly development summary.
- About 25 new projects were issued permits since the beginning of 2007.
Surface and Allen are optimistic that there will be a trend toward new commercial projects in the next year and that the existing trend for expansion likely will continue.
“Just in the last month, we had three different developers come to Gillette already just to feel out the economy. That’s very encouraging,” Allen said.
The city’s investment in infrastructure during the past few years, which includes the $16 million in state loans to begin the process to build a new 42-mile water pipeline, and the near completion of power plants near the city support the optimistic assertion that there will be more growth.
More infrastructure encourages businesses to continue to expand, Surface said.
House construction
While home building has slowed and some out-of-town contractors are pulling out, there still are many projects in the pipeline for completion.
- There were 148 housing permits issued in the first three months of 2009.
- The number is up from 98 permits during the first three months of 2008.
- There were 128 permits issued for the same period in 2007.
About 1,981 housing permits still are in the pipeline. Many are in the final plat stage. They are a result of the subdivision activity that took place at the end of 2005 through 2007, Surface said.
About 477 of the units are in the final plat review stage and include units for Iron Horse, Remington Estates, Bittercreek, Sawgrass and Legacy Ridge subdivisions.
The city still has a need for family housing based on the city’s very low vacancy rates for apartments and manufactured homes.
- The rate for apartments has gone up from .1 percent in the fourth quarter of 2008 to 1.4 percent at the end of March.
- Manufactured homes increased from 5.1 percent to 5.3 percent.
The city contends that a vacancy rate for apartments of 5 percent would create a good balance. When numbers are low, there’s a shortage.
It’s difficult to attract developers of multi-family dwellings to Gillette because of the high land cost. Developers also want to make sure the economy can sustain it.
The housing market is still going strong, said Jeff Riesland, Century 21 Real Estate Associates agent.
Many people who rented a home are now able to afford to buy a home after a price correction took place earlier in the year.
Loans still are being made for many of the buyers who qualify for rural development loans. They also are taking advantage of the low-interest rates.
The real estate forecast looks good going into the spring and the summer, Riesland said. He added that his office has had numerous calls on commercial property in the past few months.
Economic development
Bringing new business to Gillette is Campbell County Economic Development Corp.’s goal.
The agency conducted a retail market analysis in 2005 that identified the characteristics of the city that are meaningful to retail businesses.
Gillette has a lot of “bleed out” of people who spend money in other communities such as Rapid City, S.D., and Casper.
The study gave a snapshot of what the retail picture was like and also a few items that needed work. It didn’t give a long-term strategy.
The agency will now send representatives to meet with various commercial developers with the International Council of Shopping Centers to introduce them to Gillette.
“We’re meeting with them and letting them know that the whole country is not in a recession,” said Susan Jerke, interim executive director.
The agency also has applied for a United States Department of Agriculture grant to help them revamp the original study and produce marketing plans and contacts.
Most businesses are skeptical of Gillette because of its low population numbers and its mineral-based economy that doesn’t have a lot of diversity.
The draw to Gillette from surrounding communities in Crook and Johnson counties and the rest of Campbell County places the city on the threshold needed for most businesses to move in — roughly 50,000 people.
Work force also is an issue that is improving in the county. More people come to Gillette each day who are drawn to different fields of work or the latest education opportunities.
The agency also is working with the Campbell County Chamber of Commerce and the city to help retain and expand existing businesses.
While the agency works to build Gillette’s retail, there are others like the Prime Rib, Subway, Smith’s and Maria’s that continue to take risks and continue to expand.
“That’s just another example of businesses who are here committing their financial resources to expand, showing faith in the economic climate that is here in Campbell County,” Surface said.
Ready to open
As for Peraltz, he’s nervous and he’s cautious.
Seeing what happened to the former chicken business that once was housed in his new restaurant has taught him that even with a new building he must be prepared for what’s to come.
For the past several weeks, he’s been working to re-create the former fast-food place as a sit-down lunch and dinner restaurant. He’s remodeled the kitchen, installed a smoker to cook prime rib and rotisserie chicken and he’s applied for a liquor license.
At 10 a.m. Wednesday, the doors to Chicos Restaurant will open on Boxelder Road near Home Depot, and he’ll be put to the test.
“It’s ready or not, we must, we have to go,” Peraltz said.
Thursday, April 30, 2009
First-time buyers find deals, help perk up house sales
By Stephanie Armour, USA TODAY
Kelly Butler just got a bargain.
Sure, her new three-bedroom home came with fake barn wood nailed to the bathroom walls, carpet that had to be ripped up, broken closet doors and a need for plumbing and tile work.
EXAMPLES: How buyers saved on 2 homes
No matter. Butler, 27, and her husband, Jim, 28, represent the new face of today's home buyers: first-timers who are snapping up distressed homes and fixer-uppers that are being sold at bargain prices.
Up to 45% of homes being purchased today are in that category, according to an April report by the National Association of Realtors (NAR) — and that's a major force driving existing home sales. First-time buyers accounted for more than half of all home sales in March, with activity concentrated in lower price ranges. But there is a troublesome side, because sales of foreclosed and other distressed homes tend to drag down overall home prices across the USA. These properties typically sell for 20% less than traditional homes.
Economists tracking the beleaguered housing market say these first-time home buyers represent a critical demographic that could help lead the industry out of its doldrums by buying up much of the excess inventory of homes that is drawing down home values nationwide. And in one promising sign, the inventory of unsold homes is starting to shrink. Total housing inventory at the end of March fell 1.6% to 3.74 million existing homes for sale, which represents a 9.8-month supply at the current sales pace, compared with a 9.7-month supply in February.
The Butlers have been fixing up their home since they moved in on Jan. 31. They plan to paint the brown exterior a cheerier white, with blue shutters. For 3% down, they got the foreclosed home in Stratford, Conn., with three bedrooms and two baths for $213,000 and a fixed loan at a 5.5% interest rate. The price was about 35% less than the previous owners paid a few years ago.
"Yeah, it's a little scary from the outside," says Kelly, an operations manager at The Regus Group, which rents office space. "But these fixer-uppers are really selling. There were even bidding wars. All these people were fighting for these houses."
The hope among housing experts is that interest in millions of such properties across the nation will rise because of low interest rates, a tax credit for first-time home buyers of up to $8,000, and home prices that have sunk in some markets by more than 20%. Distressed homes are moving fast because they often sell below market value.
"In the open houses, many first-time home buyers are walking through," says Lawrence Yun, chief economist at NAR. "It's a very good sign that first-time home buyers are responding to tax incentives and historically low interest rates. I'm hopeful. This all points toward improving market conditions."
An unwanted side effect
Signs that buyers are jumping off the sidelines to purchase distressed properties is a welcome indication that sales overall could pick up. But sales at these low prices are having the unwanted side effect of drawing down home prices across the board.
Although prices rose from February to March, the national median existing-home prices for all housing types was $175,200, down 12.4% from March 2008, according to NAR, which attributes much of the downward pressure on prices to the sale of distressed homes.
And there are potential risks to home buyers, who may leap at the good prices on distressed properties only to find they lose any cost savings because the homes need so much work. The national average cost of a bathroom remodel in 2008-09 is nearly $16,000; a major kitchen remodel runs more than $56,000, and replacing a roof is $18,825, according to Hanley Wood, which analyzes the housing industry.
"It can become like that movie The Money Pit," says Leif Thomsen at Mortgage Master, a provider of mortgage services. "These first-time home buyers getting distressed properties can easily get in over their heads if they don't know what they're doing. We strongly recommend against buying any home at auction, because you can't inspect the property first and have an inspection. There are real risks."
The shift toward buying distressed properties does have an upside: In areas hard hit by foreclosures such as Florida, California and Nevada, some neighborhoods peppered with boarded-up homes with overgrown lawns now are showing signs of revitalization.
Florida was among the 10 states with the highest foreclosure rates, according to an April report by RealtyTrac. Despite a 12% decrease from the previous quarter, Florida's first-quarter total of foreclosures was still the second highest in the nation.
Foreclosure filings were reported on 119,220 Florida properties, a 36% increase from the first quarter of 2008. The state posted the nation's fourth-highest state foreclosure rate during the quarter, with one in every 73 housing units receiving a foreclosure filing.
Some houses that were in foreclosure had previous owners who took everything that wasn't nailed down, so the homes have had sinks ripped out, baseboards missing and wires dangling where light fixtures used to be; some banks that own the homes have gone in first and done some fix-up work, such as installing sinks, to spur sales.
Those distressed properties and low prices are boosting sales, with NAR reporting home sales higher than a year ago in Florida.
"What I'm seeing is incredible. At ground zero in Florida, my business has tripled overnight," says Suzanne White, an agent at ZipRealty in Tampa. "There isn't grass overgrown and mosquitoes all around in these neighborhoods anymore. First-time home buyers are saying rates are so low they can pay less than rent. The bank-owned properties are getting multiple offers and selling higher than asking price."
Sacrifices for fixer-uppers
Financing isn't as easy to get as it was during 2006, the peak of the housing boom. Buyers need good credit and a solid income that can be documented, and they need to be prepared to put money down.
The median down payment by first-time buyers was 4% in 2008, up from 2% in 2007, according to NAR. Many are turning to Federal Housing Administration (FHA) loans, which can require as little as 3.5% down.
The volume of single-family FHA-insured loans originated has tripled from $59 billion in fiscal year 2007 to more than $180 billion in 2008.
Buying a fixer-upper also can mean sacrifices: Buyers may have to wait before they can move in because the homes need work, and first-time buyers often have to look past a home's problems to see the potential. For those buying foreclosed homes, dealing with a bank instead of a private owner can sometimes mean lengthy delays.
The sale of distressed properties could have a trickle-down effect that may help boost remodeling businesses, which have seen business slump as homeowners halt renovation plans.
And first-time home buyers are showing more interest. More than three-quarters of first-time home buyers say now is a good time to buy a home despite concern about the economy, according to a March survey by Century 21 Real Estate of 1,000 prospective first-time buyers. More than 80% say prices are affordable, and 68% say now is a better time to buy than six months ago.
Kimberly Miles, 26, is one of them. In February, she got an FHA-insured mortgage on a three-bedroom house with a two-car garage, overlooking a lake in Myrtle Beach, S.C.
The flooring, which smelled because of the previous owner's pets and smoking habit, was ripped up. The drywall needed caulking, and the previous owner had taken the fridge.
The home, which had been in foreclosure, was listed at $142,000 in November and dropped to $122,000 in January. With the FHA-loan, she had to put down only 3.5%, and the $8,000 federal tax credit will pay for a lot of the renovations.
"It smelled awful. You couldn't breathe in there, but I saw the potential," says Miles, who works for the Myrtle Beach Area Chamber of Commerce and Convention and Visitors Bureau. "During the housing boom, I could never have gotten it."
>
FIRST-TIME HOMEBUYERS FIND DEALS | Story
house
House
Buyers: Brian McGee, Chelsea Johnson
* Where: East Atlanta neighborhood in Georgia.
* What did they get? The new home, which stood empty 1 1/2 years, has four bedrooms, 3 1/2 baths, hardwood floors, large deck and is eight minutes from downtown Atlanta. The original asking price was $400,000; the purchase price was $280,000 (seller pays closing costs).
William Kincaid
* Where: Mason City, Iowa.
* What did he get? The home is new construction in a new cul-de-sac carved out of an Iowa corn field. It was on the market a year or more, and the homebuilder has since gone bankrupt. Kincaid said he saved maybe $30,000 to $40,0000 and only looked a few months.
Kelly Butler just got a bargain.
Sure, her new three-bedroom home came with fake barn wood nailed to the bathroom walls, carpet that had to be ripped up, broken closet doors and a need for plumbing and tile work.
EXAMPLES: How buyers saved on 2 homes
No matter. Butler, 27, and her husband, Jim, 28, represent the new face of today's home buyers: first-timers who are snapping up distressed homes and fixer-uppers that are being sold at bargain prices.
Up to 45% of homes being purchased today are in that category, according to an April report by the National Association of Realtors (NAR) — and that's a major force driving existing home sales. First-time buyers accounted for more than half of all home sales in March, with activity concentrated in lower price ranges. But there is a troublesome side, because sales of foreclosed and other distressed homes tend to drag down overall home prices across the USA. These properties typically sell for 20% less than traditional homes.
Economists tracking the beleaguered housing market say these first-time home buyers represent a critical demographic that could help lead the industry out of its doldrums by buying up much of the excess inventory of homes that is drawing down home values nationwide. And in one promising sign, the inventory of unsold homes is starting to shrink. Total housing inventory at the end of March fell 1.6% to 3.74 million existing homes for sale, which represents a 9.8-month supply at the current sales pace, compared with a 9.7-month supply in February.
The Butlers have been fixing up their home since they moved in on Jan. 31. They plan to paint the brown exterior a cheerier white, with blue shutters. For 3% down, they got the foreclosed home in Stratford, Conn., with three bedrooms and two baths for $213,000 and a fixed loan at a 5.5% interest rate. The price was about 35% less than the previous owners paid a few years ago.
"Yeah, it's a little scary from the outside," says Kelly, an operations manager at The Regus Group, which rents office space. "But these fixer-uppers are really selling. There were even bidding wars. All these people were fighting for these houses."
The hope among housing experts is that interest in millions of such properties across the nation will rise because of low interest rates, a tax credit for first-time home buyers of up to $8,000, and home prices that have sunk in some markets by more than 20%. Distressed homes are moving fast because they often sell below market value.
"In the open houses, many first-time home buyers are walking through," says Lawrence Yun, chief economist at NAR. "It's a very good sign that first-time home buyers are responding to tax incentives and historically low interest rates. I'm hopeful. This all points toward improving market conditions."
An unwanted side effect
Signs that buyers are jumping off the sidelines to purchase distressed properties is a welcome indication that sales overall could pick up. But sales at these low prices are having the unwanted side effect of drawing down home prices across the board.
Although prices rose from February to March, the national median existing-home prices for all housing types was $175,200, down 12.4% from March 2008, according to NAR, which attributes much of the downward pressure on prices to the sale of distressed homes.
And there are potential risks to home buyers, who may leap at the good prices on distressed properties only to find they lose any cost savings because the homes need so much work. The national average cost of a bathroom remodel in 2008-09 is nearly $16,000; a major kitchen remodel runs more than $56,000, and replacing a roof is $18,825, according to Hanley Wood, which analyzes the housing industry.
"It can become like that movie The Money Pit," says Leif Thomsen at Mortgage Master, a provider of mortgage services. "These first-time home buyers getting distressed properties can easily get in over their heads if they don't know what they're doing. We strongly recommend against buying any home at auction, because you can't inspect the property first and have an inspection. There are real risks."
The shift toward buying distressed properties does have an upside: In areas hard hit by foreclosures such as Florida, California and Nevada, some neighborhoods peppered with boarded-up homes with overgrown lawns now are showing signs of revitalization.
Florida was among the 10 states with the highest foreclosure rates, according to an April report by RealtyTrac. Despite a 12% decrease from the previous quarter, Florida's first-quarter total of foreclosures was still the second highest in the nation.
Foreclosure filings were reported on 119,220 Florida properties, a 36% increase from the first quarter of 2008. The state posted the nation's fourth-highest state foreclosure rate during the quarter, with one in every 73 housing units receiving a foreclosure filing.
Some houses that were in foreclosure had previous owners who took everything that wasn't nailed down, so the homes have had sinks ripped out, baseboards missing and wires dangling where light fixtures used to be; some banks that own the homes have gone in first and done some fix-up work, such as installing sinks, to spur sales.
Those distressed properties and low prices are boosting sales, with NAR reporting home sales higher than a year ago in Florida.
"What I'm seeing is incredible. At ground zero in Florida, my business has tripled overnight," says Suzanne White, an agent at ZipRealty in Tampa. "There isn't grass overgrown and mosquitoes all around in these neighborhoods anymore. First-time home buyers are saying rates are so low they can pay less than rent. The bank-owned properties are getting multiple offers and selling higher than asking price."
Sacrifices for fixer-uppers
Financing isn't as easy to get as it was during 2006, the peak of the housing boom. Buyers need good credit and a solid income that can be documented, and they need to be prepared to put money down.
The median down payment by first-time buyers was 4% in 2008, up from 2% in 2007, according to NAR. Many are turning to Federal Housing Administration (FHA) loans, which can require as little as 3.5% down.
The volume of single-family FHA-insured loans originated has tripled from $59 billion in fiscal year 2007 to more than $180 billion in 2008.
Buying a fixer-upper also can mean sacrifices: Buyers may have to wait before they can move in because the homes need work, and first-time buyers often have to look past a home's problems to see the potential. For those buying foreclosed homes, dealing with a bank instead of a private owner can sometimes mean lengthy delays.
The sale of distressed properties could have a trickle-down effect that may help boost remodeling businesses, which have seen business slump as homeowners halt renovation plans.
And first-time home buyers are showing more interest. More than three-quarters of first-time home buyers say now is a good time to buy a home despite concern about the economy, according to a March survey by Century 21 Real Estate of 1,000 prospective first-time buyers. More than 80% say prices are affordable, and 68% say now is a better time to buy than six months ago.
Kimberly Miles, 26, is one of them. In February, she got an FHA-insured mortgage on a three-bedroom house with a two-car garage, overlooking a lake in Myrtle Beach, S.C.
The flooring, which smelled because of the previous owner's pets and smoking habit, was ripped up. The drywall needed caulking, and the previous owner had taken the fridge.
The home, which had been in foreclosure, was listed at $142,000 in November and dropped to $122,000 in January. With the FHA-loan, she had to put down only 3.5%, and the $8,000 federal tax credit will pay for a lot of the renovations.
"It smelled awful. You couldn't breathe in there, but I saw the potential," says Miles, who works for the Myrtle Beach Area Chamber of Commerce and Convention and Visitors Bureau. "During the housing boom, I could never have gotten it."
>
FIRST-TIME HOMEBUYERS FIND DEALS | Story
house
House
Buyers: Brian McGee, Chelsea Johnson
* Where: East Atlanta neighborhood in Georgia.
* What did they get? The new home, which stood empty 1 1/2 years, has four bedrooms, 3 1/2 baths, hardwood floors, large deck and is eight minutes from downtown Atlanta. The original asking price was $400,000; the purchase price was $280,000 (seller pays closing costs).
William Kincaid
* Where: Mason City, Iowa.
* What did he get? The home is new construction in a new cul-de-sac carved out of an Iowa corn field. It was on the market a year or more, and the homebuilder has since gone bankrupt. Kincaid said he saved maybe $30,000 to $40,0000 and only looked a few months.
Wednesday, April 29, 2009
Obama expands foreclosure fix
Two steps: Second liens now covered by modification program; servicers must offer eligible borrowers principal reduction under Hope for Homeowners.
By Tami Luhby, CNNMoney.com senior writer
NEW YORK (CNNMoney.com) -- The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.
Announced with great fanfare in mid-February, the president's $75 billion program has gotten off to a slow start. Loan servicers only recently started taking applications and many delinquent borrowers have complained about being left in the cold because their home values have dropped or they've lost their jobs.
The administration is seeking to address some of the concerns by tweaking the original modification plan, which calls for adjusting eligible borrowers' loans so monthly payments are no more than 31% of pre-tax income.
Servicers covering 75% of the nation's mortgages are now participating in the program, which also allows some homeowners with little or no equity to refinance their mortgages, a senior administration official said Tuesday. Together, the plans are expected to help up to 9 million avoid foreclosure.
Second mortgage roadblock
During the housing frenzy, many borrowers obtained second mortgages to allow them to put little or nothing down when buying a home. Up to half of at-risk borrowers have second liens, according to the administration.
These loans have complicated the modification process. For one thing, they add to troubled homeowners' debt levels. Also, mortgage investors have balked at reducing payments on first mortgages when the second loan was left intact.
Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor.
Servicers will be paid $500 for each modification and an additional $250 annually for three years if the borrower stays current. Borrowers can receive up to $250 per year for five years to pay down their first mortgage.
Investors can also receive a payment in exchange for extinguishing the second lien. They would receive 3 cents on the dollar for loans more than 180 days delinquent and between 4 cents and 12 cents for less delinquent loans, depending on the borrowers' debt levels.
Servicers who join the new program must modify secondloans when a borrower's first mortgage is adjusted. It will likely take a month to implement, but it should not slow down the modifications of primary mortgages, the administration said.
"By bringing both the first lien and second lien program together, we can reduce monthly payments for borrowers and make it much more likely that they can stay in their homes," a senior administration official said.
Hope for Homeowners option
Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.
Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.
Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home's current value.
Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home's value. The change would also reduce the program's high fees, which turned off many troubled borrowers.
As an incentive to participate, servicers will be paid $2,500 for each refinancing, while lenders who originate the new loans will receive up to $1,000 a year for three years, as long as the loan remains current.
Separately, however, another pillar of the president's plan appears to be headed for defeat this week. The Senate is not expected to pass legislation allowing bankruptcy judges to modify mortgages. The administration had sought this change to pressure servicers to modify loans before borrowers declare bankruptcy.
By Tami Luhby, CNNMoney.com senior writer
NEW YORK (CNNMoney.com) -- The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.
Announced with great fanfare in mid-February, the president's $75 billion program has gotten off to a slow start. Loan servicers only recently started taking applications and many delinquent borrowers have complained about being left in the cold because their home values have dropped or they've lost their jobs.
The administration is seeking to address some of the concerns by tweaking the original modification plan, which calls for adjusting eligible borrowers' loans so monthly payments are no more than 31% of pre-tax income.
Servicers covering 75% of the nation's mortgages are now participating in the program, which also allows some homeowners with little or no equity to refinance their mortgages, a senior administration official said Tuesday. Together, the plans are expected to help up to 9 million avoid foreclosure.
Second mortgage roadblock
During the housing frenzy, many borrowers obtained second mortgages to allow them to put little or nothing down when buying a home. Up to half of at-risk borrowers have second liens, according to the administration.
These loans have complicated the modification process. For one thing, they add to troubled homeowners' debt levels. Also, mortgage investors have balked at reducing payments on first mortgages when the second loan was left intact.
Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor.
Servicers will be paid $500 for each modification and an additional $250 annually for three years if the borrower stays current. Borrowers can receive up to $250 per year for five years to pay down their first mortgage.
Investors can also receive a payment in exchange for extinguishing the second lien. They would receive 3 cents on the dollar for loans more than 180 days delinquent and between 4 cents and 12 cents for less delinquent loans, depending on the borrowers' debt levels.
Servicers who join the new program must modify secondloans when a borrower's first mortgage is adjusted. It will likely take a month to implement, but it should not slow down the modifications of primary mortgages, the administration said.
"By bringing both the first lien and second lien program together, we can reduce monthly payments for borrowers and make it much more likely that they can stay in their homes," a senior administration official said.
Hope for Homeowners option
Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.
Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.
Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home's current value.
Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home's value. The change would also reduce the program's high fees, which turned off many troubled borrowers.
As an incentive to participate, servicers will be paid $2,500 for each refinancing, while lenders who originate the new loans will receive up to $1,000 a year for three years, as long as the loan remains current.
Separately, however, another pillar of the president's plan appears to be headed for defeat this week. The Senate is not expected to pass legislation allowing bankruptcy judges to modify mortgages. The administration had sought this change to pressure servicers to modify loans before borrowers declare bankruptcy.
Tuesday, April 28, 2009
A wave of homebuilder consolidation?
With an industry on the ropes, analysts say more companies will join forces - some to grow, some just to survive.
By Janet Morrissey, contributing writer
NEW YORK (Fortune) -- When Richard Dugas, the president and CEO of Pulte Homes Inc. recently talked about his company's $3.1 billion purchase of rival Centex Corp., he added fuel to the fire for a possible wave of consolidation in the battered homebuilding sector.
"This is the right combination at the right time," Dugas told analysts when the deal was announced earlier this month. "As the industry prepares for further consolidation, we believe acting first gives us an advantage."
Now analysts and investors are placing bets on which marquee names might be next for a hook-up - and which ones will close their doors.
Large, well-capitalized homebuilders with low debt, such as D.R. Horton Inc., (DHI, Fortune 500) KB Home (KBH), and Pulte (PHM, Fortune 500) - as well as cash-flush private equity firms - will likely be shopping around, while highly leveraged builders with significant chunks of debt coming due in the next three years are likely targets, industry experts say.
Like companies in just about every other industry, homebuilders are having a tough time refinancing in the frozen credit markets. As a result, distressed builders, unable to meet debt calls, could be forced to sell assets or the entire company at bargain-basement prices.
Builders with debt-to-market cap ratios above 75% include Beazer Homes USA Inc. (BZH), Hovnanian Enterprises Inc. (HOV), and Standard Pacific Corp. (SPF), according to Bob Curran, managing director at Fitch Ratings. Their high debt makes them vulnerable to takeouts if the credit markets don't improve in the next two years, experts say.
Builders on the hunt may also be looking for strategic targets. Toll Brothers Inc. (TOL) has a robust balance sheet, but its strong brand name and leadership in high-end housing could make it an attractive buy for a company wanting to expand into the luxury sector, says Stephen Kim, senior real estate analyst AT Alpine Woods Capital Investors LLC, which holds shares in homebuilding stocks including Toll Brothers.
KB Home could fit well with Ryland Group Inc. (RYL) which shares a similar market cap and business strategy, says UBS analyst David Goldberg. But, he notes, "Who knows if KB wants to be acquisitive?"
Then there's D.R. Horton, which could acquire another company to regain its position as the country's largest builder. "There is a certain empire-building nature to this industry, and people want to be the biggest, and you can't be the biggest picking up pieces of raw land or buying private builders - you can't get scale fast enough. So that might push people to do deals" says Goldberg.
Too much too soon?
Most industry experts believe consolidation will accelerate, but many wonder if Pulte might have jumped in prematurely and overpaid for Centex (CTX, Fortune 500).
"We have always felt that there would be additional consolidation in the industry - just not right yet," said Joe Snider, vice president and senior credit officer at Moody's Investors Service in New York. "We're in the middle - we're not at the end yet - of a very deep and long-lasting downturn."
Based on Pulte's closing price on April 7 just before the deal was unveiled, the transaction valued Centex at $10.50 a share, which represented a 38% premium to its closing price of $7.62.
"My gut would tell me that what Pulte paid was a little bit high," says Goldberg. If the market rebounds and prices go up, "Pulte will look like geniuses for buying a big land position at the bottom of the market," he says. But if the market tanks for two or three more years, he believes the merger will be viewed as ill-timed.
Although traffic and sales have improved for homebuilders since February, it's not clear if the Pulte/Centex union is a blip or the beginning of a trend, says Carl Reichardt, an analyst with Wachovia Capital Markets LLC.
Indeed, plunging home prices, rising inventory, surging foreclosures and the frozen credit markets have decimated the housing sector. Home prices are off about 30% on average from their peak in 2005, with once-hot markets such as Las Vegas, Phoenix, and parts of Florida and California tumbling 50% or more, says Kim. "And we're looking for another roughly 10% decline in home prices" this year, he says.
As a result, the nation's publicly-traded homebuilders have slashed prices, boosted incentives and taken roughly $30 billion in writedowns during this period, says Snider. Homebuilding stocks have plummeted 88% from their peak in 2005 until their trough in November 2008, according to Kim. Although they've rallied 6.5% so far in 2009, they're still off about 79% from their peak, he says.
Casualties of the housing bust
Analysts expect a number of distressed builders to exit the market through bankruptcy filings, mergers or fire-sales in the next year or two.
So far, about 17 of the country's top 100 homebuilders - including three publicly-traded builders - Levitt & Sons LLC, WCI Communities Inc., and Tousa Inc. - have filed for Chapter 11 bankruptcy protection over the past two years, says Reichardt. More recently, Comstock Homebuilding Cos. Inc. indicated it may seek bankruptcy protection
Publicly-traded builders, in general, are better capitalized than their rivals in the private sector. Many learned tough lessons from the crippling downturn almost 20 years ago where high debt and inventory levels pushed a flurry of builders into bankruptcy.
Some of the names that survived this rocky period, such as NVR Inc. and M.D.C. Holdings Inc., have among the lowest debt levels and land holdings today. "They learned a bitter, but very wonderful, lesson," says Snider. "They're the best positioned homebuilders today."
Still, many companies are at risk. "Some of the weaker public builders have already gone, and there may be more to go," says Kim. And that's where the well-capitalized players can step in, but they may be best suited to hold off a while longer.
"This is the arguably the worst downturn since the end of World War II and more severe than the late '80s and early '90s," says Curran. "Most parties will probably tend to wait until it's clear that a bottom has been established, and into the early stages of the upside," said Curran.
"I don't think anybody should feel rushed here," said Kim. "But I think they will look and they are looking."
By Janet Morrissey, contributing writer
NEW YORK (Fortune) -- When Richard Dugas, the president and CEO of Pulte Homes Inc. recently talked about his company's $3.1 billion purchase of rival Centex Corp., he added fuel to the fire for a possible wave of consolidation in the battered homebuilding sector.
"This is the right combination at the right time," Dugas told analysts when the deal was announced earlier this month. "As the industry prepares for further consolidation, we believe acting first gives us an advantage."
Now analysts and investors are placing bets on which marquee names might be next for a hook-up - and which ones will close their doors.
Large, well-capitalized homebuilders with low debt, such as D.R. Horton Inc., (DHI, Fortune 500) KB Home (KBH), and Pulte (PHM, Fortune 500) - as well as cash-flush private equity firms - will likely be shopping around, while highly leveraged builders with significant chunks of debt coming due in the next three years are likely targets, industry experts say.
Like companies in just about every other industry, homebuilders are having a tough time refinancing in the frozen credit markets. As a result, distressed builders, unable to meet debt calls, could be forced to sell assets or the entire company at bargain-basement prices.
Builders with debt-to-market cap ratios above 75% include Beazer Homes USA Inc. (BZH), Hovnanian Enterprises Inc. (HOV), and Standard Pacific Corp. (SPF), according to Bob Curran, managing director at Fitch Ratings. Their high debt makes them vulnerable to takeouts if the credit markets don't improve in the next two years, experts say.
Builders on the hunt may also be looking for strategic targets. Toll Brothers Inc. (TOL) has a robust balance sheet, but its strong brand name and leadership in high-end housing could make it an attractive buy for a company wanting to expand into the luxury sector, says Stephen Kim, senior real estate analyst AT Alpine Woods Capital Investors LLC, which holds shares in homebuilding stocks including Toll Brothers.
KB Home could fit well with Ryland Group Inc. (RYL) which shares a similar market cap and business strategy, says UBS analyst David Goldberg. But, he notes, "Who knows if KB wants to be acquisitive?"
Then there's D.R. Horton, which could acquire another company to regain its position as the country's largest builder. "There is a certain empire-building nature to this industry, and people want to be the biggest, and you can't be the biggest picking up pieces of raw land or buying private builders - you can't get scale fast enough. So that might push people to do deals" says Goldberg.
Too much too soon?
Most industry experts believe consolidation will accelerate, but many wonder if Pulte might have jumped in prematurely and overpaid for Centex (CTX, Fortune 500).
"We have always felt that there would be additional consolidation in the industry - just not right yet," said Joe Snider, vice president and senior credit officer at Moody's Investors Service in New York. "We're in the middle - we're not at the end yet - of a very deep and long-lasting downturn."
Based on Pulte's closing price on April 7 just before the deal was unveiled, the transaction valued Centex at $10.50 a share, which represented a 38% premium to its closing price of $7.62.
"My gut would tell me that what Pulte paid was a little bit high," says Goldberg. If the market rebounds and prices go up, "Pulte will look like geniuses for buying a big land position at the bottom of the market," he says. But if the market tanks for two or three more years, he believes the merger will be viewed as ill-timed.
Although traffic and sales have improved for homebuilders since February, it's not clear if the Pulte/Centex union is a blip or the beginning of a trend, says Carl Reichardt, an analyst with Wachovia Capital Markets LLC.
Indeed, plunging home prices, rising inventory, surging foreclosures and the frozen credit markets have decimated the housing sector. Home prices are off about 30% on average from their peak in 2005, with once-hot markets such as Las Vegas, Phoenix, and parts of Florida and California tumbling 50% or more, says Kim. "And we're looking for another roughly 10% decline in home prices" this year, he says.
As a result, the nation's publicly-traded homebuilders have slashed prices, boosted incentives and taken roughly $30 billion in writedowns during this period, says Snider. Homebuilding stocks have plummeted 88% from their peak in 2005 until their trough in November 2008, according to Kim. Although they've rallied 6.5% so far in 2009, they're still off about 79% from their peak, he says.
Casualties of the housing bust
Analysts expect a number of distressed builders to exit the market through bankruptcy filings, mergers or fire-sales in the next year or two.
So far, about 17 of the country's top 100 homebuilders - including three publicly-traded builders - Levitt & Sons LLC, WCI Communities Inc., and Tousa Inc. - have filed for Chapter 11 bankruptcy protection over the past two years, says Reichardt. More recently, Comstock Homebuilding Cos. Inc. indicated it may seek bankruptcy protection
Publicly-traded builders, in general, are better capitalized than their rivals in the private sector. Many learned tough lessons from the crippling downturn almost 20 years ago where high debt and inventory levels pushed a flurry of builders into bankruptcy.
Some of the names that survived this rocky period, such as NVR Inc. and M.D.C. Holdings Inc., have among the lowest debt levels and land holdings today. "They learned a bitter, but very wonderful, lesson," says Snider. "They're the best positioned homebuilders today."
Still, many companies are at risk. "Some of the weaker public builders have already gone, and there may be more to go," says Kim. And that's where the well-capitalized players can step in, but they may be best suited to hold off a while longer.
"This is the arguably the worst downturn since the end of World War II and more severe than the late '80s and early '90s," says Curran. "Most parties will probably tend to wait until it's clear that a bottom has been established, and into the early stages of the upside," said Curran.
"I don't think anybody should feel rushed here," said Kim. "But I think they will look and they are looking."
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