Thursday, July 27, 2006
New Home Sales For June
Last month the months of supply for all new homes in May was given as 5.5, and that has been revised to 5.9. This month's is given as 6.1, and I expect that to be revised upward in next month's release. This matches what I have been hearing and reading anecdotally, which is that the major constraint on new home sales in quite a few areas is not price but a combination of inability to get financing by first-time buyers and an inability to sell the first home, followed by a cancelled sale and a forfeited deposit. NAR's pending home sales index will be released August 1st, and I think that will be a better leading indicator.
If these supply figures are even close to correct, there has been a major withdrawal of homes from the market. I remain extremely dubious about the months of supply given.
The quarterly figures are more reliable, because they have larger totals. See page 6 of the quarterly sales release. For the US as a whole, in a rising market the second quarter median should be higher than the first quarter, and instead it is lower. In a falling market incentives aren't deducted from the sales price, so comparing sales prices in declining market to ones in tip-over or rising market understates the drop. The average sales price shows less of a drop, which is significant because it reflects the mix of properties being sold.
I would say, and this is preliminary, that these figures reflect financing constraints based primarily on lower appraised values, which affect Loan To Value ratios and prevent prospective buyers from getting financing. (Somebody, somewhere is going to end up with the paper for the loan, and investors want to buy portfolios in which the underlying value of the property exceeds the total of the debt.) We may be seeing a pretty drastic tip over, because the developers have been pulling out all the stops to get borrowers qualified.
See, for example, Beazer's fine offer advertised on July 15th of mortgages with monthly payments of $750 or $1,000 in a development. Then look at the disclaimer:
*Must use Beazer Mortgage (Broker number 01223451). Available only on inventory homes that close on or before August 31, 2006 or at completion of home, whichever comes first. Must be owner occupied. Offer does not apply to all communities. Check with sales representative for further details. Offer subject to change or cancellation without notice. Example: Purchase price $288,601.00 First Mortgage Loan Amount $230,880.00 payment for year one $824.00 subsidized by seller $ 76.00, year two $886.66, year three $953.16, year four $1,024.65, year five $1,101.50 at 7.593 % adjustable interest rate APR 8.10%. Second mortgage $ 57,721.00 payment for first twelve months of $529.11 at 11.00 % Interest Only paid by Seller, remaining term fourteen years, interest only at prime plus 4.5 margin current APR 11.143%, maximum rate 11.143%, payments of $529.11. Estimated closing costs $ 8,658.03. Above total payments are loan payments only and do not include taxes ($ 288.60), insurance ($45.00) monthly assessment ($110.00). Example amounts based on home at Riverdale North Discovery Collection Lot # 3016. Minimum middle FICO scores 650, stated income underwriting, three months reserve required in bank at time of close of $7,805.34 in example above. Income limits apply. Negative Amortization of loan required to achieve advertised payment, required loan payments and other fees may vary by home sales price and community.See what I mean about funny money loans? The borrower's payments in the first example go:
**Must use Beazer Mortgage (Broker number 01223451). Available only on inventory homes that close on or before August 31, 2006 or at completion of home, whichever comes first. Must be owner occupied. Offer does not apply to all communities. Check with sales representative for further details. Offer subject to change or cancellation without notice. Example: Purchase price $506,349.00, First Mortgage Loan Amount $405,079.00 payment for year one $1,447.12 subsidized by seller $447.12, year two $1,555.65, year three $1,672.33, year four $1,797.75, year five $1,932.58 at 7.593 % adjustable interest rate APR 8.10%. Second mortgage $101,270.00 payment for first twelve months of $928.31 at 11.00 % Interest Only paid by Seller, remaining term fourteen years, interest only at prime plus 4.5 margin current APR 11.143%, maximum rate 11.143%, payments of $928.31. Estimated closing costs $15,190.47. Above total payments are loan payments only and do not include taxes ($506.35), insurance ($70.00) monthly assessment ($73.00). Example amounts based on home at Fieldstone Meadows Lot # 30. Minimum middle FICO scores 650, stated income underwriting, three months reserve required in bank at time of close of $13,307.61 in example above. Income limits apply. Negative Amortization of loan required to achieve advertised payment, required loan payments and other fees may vary by home sales price and community.
Year 1: $824 - 76 (second paid by Beazer) = $748
Year 2: $886 + $529 = $1,415
Year 3: $953 + $529 = $1,482
Year 4: $1,024 + $529 = $1,553
Plus, to achieve the low initial down payment the borrower is signing up for negative amortization, which means that their loan balance rises for a while instead of dropping. The first mortgage is adjustable too, so the payments could go even higher. Very few people who take this deal would be able to keep the house, because unless they brought money to the table they would almost certainly be unable to refi out of it (without double digit price inflation, which is no longer in the cards). The second example is no better.
This should not be legal. This is misleading and deceptive advertising, and the FTC should go after all these funny money loan sharks. People will go into the sales office and write them a deposit check and sign a contract on the basis of the large number in the advertisement. If they come to their senses they'll walk away and lose their deposit. That's the best possible outcome, and note that they will be using Beazer as their mortgage broker, so they may never get independent advice.
When you look at new home sales figures and prices keep the above example in mind, because it is certainly not unique. I hope this helps you to understand why the downside to this market is so huge. In many cases, "homeowners" will never be able to make even their first reset payment. There are cases of people unable to make their very first mortgage payment.
If you think this is funny, consider the impact on your home value. Sure, you may have signed up for a 30 year fixed-rate last year when you bought. But your home's value will be depressed when the forced sales from this type of maneuver start rolling back onto the market en masse. When you find your home worth less four years from now in nominal dollars than it is today, you'll understand what a brutal racket this has been.
I never thought I would become a wild-eyed consumer activist, but at this point all I want to do is find some public interest law firm and give them the ammo to sue the britches right off these and similar people. You see, I calculate loans and consumer disclosures, and I can usually find some sort of error in about 50% of RESPA loan document packages (although that isn't true for my banks). And Hillary? Hillary with her proposal to offer downpayment assistance? Hillary is looking after the Beazers of the world, and not the people she claims to want to help. Watch her campaign finance contributions - you'll see. Because a $5,000 taxpayer-funded downpayment gives a lot of room to roam for crooked outfits like this, and only abuses the "buyer".
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