Here Comes the Cavalry

There is a tremendous likelihood, especially after the good data released last Thursday for unemployment insurance claims (they were down by about 2,000, and the 40-week average was down by a convincing 4,500), that the report on employment gains in February (to be released this Friday) will cause a lot of rejoicing in the real estate markets.

At this moment, there is just about nothing more important to the on-going recovery--that is, the strengthening of real estate sales volume--than improvements in our nation's ability to generate jobs for those who need them. Someone contemplating the purchase of a home wants to feel confident that he or she will have a job for the foreseeable future, and thus be able to make the monthly payments on a large and inevitably frightening mortgage.

So--Friday should give us an attractive set of figures for job growth. We should hear from a lot of economic analysts who, of course, "knew it all along." We may see interest rates--including mortgage interest rates--edge a bit higher, as they do when they run into good economic news these days. Real estate sales should increase a bit, and it will be fascinating to see if greater sales volume will translate into a self-fulfilling cycle of sales increases. The stock markets should react with pleasure. Etc.

But there are still reasons for concern, of course, and there are many analysts who seem to write their economic judgments while sucking on lemons who will rush to tell us how skeptical they are of economic advances in such uncertain times.

They will have a point. But the greater point, at least for the moment, is that the numbers will be real. They cannot be argued away. They must be incorporated into one's view of the marketplace. And don't let anyone take away the pleasure of doing that.

*****

Holy Nuggets, Batman!

Here's an investment I'd never contemplated before. About six years ago, a Nebraska woman noticed that one of the nuggets in her order of Chicken McNuggets bore a striking resemblance to the familiar face of George Washington on a 25-cent coin. Rather than eat it, she kept it in her freezer all these years and then, inspired by a with to raise money for her church, she offered the nugget on EBay and received a bid of $8,100.

EBay at first denied the sale, since they don't handle "expired food." But they let it go through since it was for a good cause. One assumes, too, that nuggets have a lengthy shelf life in your freezer.

All of which confirms my own saying: "One man's rock'n'roll may be another's migraine." And probably proves once again that there are fortunes to be found in the most unlikely places.

Sushi, anyone?

Here's a good one. According to Harper's Index (in the December 2011 issue of the magazine), the "number of members of Congress among the wealthiest 1 percent of Americans by net worth" totals--yikes--57!

This, of course, doesn't necessarily suggest that people become rich by being elected to Congress--though they do. But it suggests that the priorities of those in office may be skewed somewhat in favor of the wealthy. True?

I'm reminded of a story about a Washington State Congressperson who was being asked what young people without the means to pay a first and last month's deposit on an apartment plus a big security deposit might consider doing to put a roof over their heads. The Congressperson sputtered for a few moments and then said, "Well, can't they dip into their trust?"

Ya shoor! What trust?

But I digress from the story begun in the last post, in which I wished to extol the apparent resilience of the real estate market. Since last week's post, however, we watched a number of housing-related indicators climb or fall in the wrong direction.

It happens.

Especially in a market that just hasn't managed to find its way yet. And we got a great example of why the market hasn't been able to find its way when, in an announcement regarding the new record low Freddie Mac average interest rate, the reporter declared that, despite the record low, the real estate market hasn't improved at all...and surely won't.

But a close look at sales shows that it has. The last figure for Existing Home Sales (in December), as a salient example, showed a pleasing 5% boost to sales over the number in November. This was both surprising and gratifying. Surprising because December, during which sales written up in October and November (generally speaking) close and complete, is usually sort of an off month in terms of sales volume. We shouldn't be overly surprised if the next Existing Home Sales figure trims its sails a bit as sales rebuilt their energy. In any case--one doesn't usuallybexpect much of a boost from December data. (We didn't get one from New Home Sales data, for example.)

Gratifying, though--as I was going to add--for the obvious reason that sales rose as much as they did...and in a month when that wasn't expected to happen.

Still, economic analysts so habitually say that the real estate market is flat, unmoving, depressed, up to its ears in rubber cement that we can't expect anything from it...even when it's starting to wake up--that it seems they wouldn't see a significantly improving indicator if it hit them on the nost. As a result, a great many people will miss the party as real estate gains strength.

We'll continue to look at this--and at greater depth--in coming posts. Meantime, thanks for reading.

Are We Up...or Are We Down?

I say we're up, but as you probably know, there are plenty of analysts arguing that the real estate market and overall economy are still slipping toward the center of a whirlpool. I don't think so, though. It does seem as if the market is dancing in a take-two-steps-forward/one-step-backward mode. Every time we begin to think the recovery has strengthened to a genuinely sustainable stride, something comes along to make us doubt...and to fuel the fires of the gloomsters who are anticipating a second recession.

But here are a few salient points to consider. Several large hedge funds--Caxton comes to mind--have decided that real estate is almost surely heading toward recovery. Note this lengthy quotation from The Wall Street Journal:

"Big money is starting to wager on housing. Hedge funds run by Caxton Associates LP, SAC Capital Advisors LP, Avenue Capital and Blackstone Group LP have been buying housing-related investments, betting on a rebound. And formerly bearish research firm Zelman & Associates now predicts a housing pickup, as does Goldman Sachs Group Inc. Other investors seem to be making the same bet. Shares of homebuilders are up nearly 32% since the end of the third quarter, as measured by the Dow Jones index tracking those shares, topping a nearly 10.5% gain for the Standard & Poor's 500.

"These stocks rallied during certain periods over the past three years, only to fall again when hopes of a housing rebound proved unfounded. However, homebuilders haven't outperformed the broader market by this much in a quarter since the end of 2008. ‘We turned bullish on housing. A rebound is coming,’ says Andrew Law, chief investment officer at $10 billion hedge-fund firm Caxton. He expects that home prices and construction will rise in 2012." [Gregory Zuckerman and Nick Timiraos, The Wall Street Journal]

[By the way, Nick Timiraos has proven to be an excellent real estate/economic reporter in the Journal...always worth reading.]

Here's how this works. In a real estate downturn, such as the one we're currently growing slowly out of, builders reduce the number of homes they construct as much as they can, trying for a golden mean in which they have enough inventory to be able to sell a home to the rare customer, but not so many homes that maintaining them eats the builder's capital needlessly.

At the same time, the number of existing homes on the market gradually declines in most real estate crunches, as sellers tire of trying to find a buyer in such a slow market. And that, more or less, is where we are now--or were until recently. The latest data from California shows an increased number of sales in many areas, but an inventory of homes for sale and that inventory has withered on the vine. Expressed in terms of the number of months it would take to sell off today's inventory at today's rate of sales, there are about 4.6 months worth of homes available.

What happens when a few more people decide they want to take advantage of today's superb interest rates and lower home prices? Pretty soon there is a squeeze and buyers are finding it difficult to meet their needs.

Looking again at the new home builder...imagine his new neighborhood sitting there waiting for an interested buyer of two. What happens when the number of buyers starts to multiply? This is tricky. The builder wants enough product to be able to meet the buyer's needs without forcing the buyer to wait a long time while the builder puts more homes together. Ideally, many buyers would like to settle into their new home in maybe a month or two, not six months or more.

Builders reach a point in a recovery--and it isn't far away, unless this market turns south again for some reason--where they have to take a deep breath and start building a lot more homes. And at that point, contractors and construction crews are back at work, plumbers and carpenters are hired, ancillary services like carpet installers and landscapers are pulled back into work. Before you know it, (1) the local area is starting to show the signs of a reviving economy and (2) people have enough money in their bank accounts and pockets to buy a few needed items. And (3) there is a vital buzz in the air again, as everyone responds to the economic vitality.

You can probably tell that we're moving toward that point--though, as I keep saying, I could be wrong. The point is less that I'm right than that this scenario could indeed be playing out. If it is, you probably won't want to miss it, so it is worth planning and preparing for the possibility of a much stronger real estate market.

I will continue to write about the signs--the economic indicators--that are telling us the real estate sector is (or is not) moving closer to recovery. I will also talk about the ways real estate professionals, mortgage loan officers, investors and homeowners might consider positioning themselves in light of the very possible changes ahead.

In the meantime, thanks for reading!

A Primer for MAPs

In our corner of the woods, here in Western Washington State, the snow is uncharacteristically high, and life has entered a Slow Zone. Cars and trucks ply the freeways at about 35 miles per hour, if they're able to make it to the freeways at all. The rest of us remain at home, thankful that our electricity is still working and throwing several more logs on the fire. My wife, who teaches in a local high school, has had an unexpected vacation this week, as have her students. The school buses simply can't handle the snow- and ice-covered roads.

The trees, with their branches outlined by snow, look like magical crystalline creations. Now and then, a branch will drop its accumulated snow or simply crack and break. The pine needles of sturdier trees have collected fistfuls of snow. It is all quite beautiful, though it restricts our activities greatly. I make the trek out to the woodshed every few hours and our supply of seasoned logs is dwindling, Further, our food supply is gradually disappearing, and we get more and more creative with our recipes. Thank goodness for canned tuna.

The government, revving up the engine of its new consumer protection agency, has released new rules governing the marketing of mortgages. The idea is simple. Let's avoid deceptive practices; let's not confuse consumers as they decide which loan will best suit their needs and plans. Good idea, in theory; but it raises all sorts of issues. The restrictions on those of us in this trade--yes, it includes companies like ours that write and distribute materials explaining mortgage programs--need to be as clear as are the resulting marketing and advertising copy. And that isn't exactly possible.

You will, for example, find the word "reasonable" sprinkled throughout the texts composed by federal agencies. It's a great legal word that means, in the end, the court will decide on this specific problem as relevant cases arise. What, for example, is a reasonable presumption of understanding on the part of the public? According to a study I looked at yesterday, the students graduating from our high schools and colleges don't necessarily understand a complex use of the English language. (This is both because our schools have not done a great job of teaching students to read, especially to read material that is beyond the eighth grade level...and because so much of the relevant material here is written in legalese and is therefore quite dense and sleep-provoking.)

In any case, we look in this issue at the basics of the marketing rules that became law in the middle of August, 2011. These words are meant to raise issues you'll want to explore further. They are very, very far from the last word on any of these subjects.

MAPs: A Quick Analysis

Several fairly recently created laws and governmental organizations are resulting in new restrictions on mortgage advertising, and they deserve our close attention. Let me say immediately that this very brief analysis does not and cannot attempt to cover all aspects of the changes, nor can or should it be mistaken for legal advice, which it is definitely not. Instead, this little essay simply wishes to point out the general outlines of what we should know about the new rules and regulations, and to ease most unwarranted of the fears that the often unspecific wording and frustrating legalese often inspire in us all.

The intention of the changes is clear, as the FTC states it. (We'll be using FTC wording throughout this small report.) “Preventing and deterring deception in advertisements for mortgages…is a primary objective of FTC law enforcement and of the Final Rule.” (The “Final Rule” is, as the name implies, the set of restrictions that remained after a process of drawing hundreds of people into working on and revising the rules and their precise wording.)

The restrictions comprise a response to the alleged misinformation that many consumers acted on in the recent past regarding mortgages that, as it turned out, they were unable to afford. “An act or practice is deceptive if: (1) There is a representation, omission of information, or practice that is likely to mislead consumers acting reasonably under the circumstances; and (2) that representation, omission, or practice is material to consumers.” In other words, the act or practice—including the wording in advertisements and promotional pieces—are deceptive if they keep consumers from acting reasonably (which we may likely see as their own best interests, though the word, “reasonably” is a favorite in legalese, and its meaning can be stretched even further than I just did).

Here we have what is perhaps the  primary problem posed by the new MAP rules. They wish to catch such a wide variety of deceptions in their net that their definitions sometimes become vague and very open to differing interpretations. Still, we can generally assume that the enforcement of these restrictions will itself be reasonable, though we should take great care to avoid any appearance of advocating for a particular loan program—or even for a view of the future movements of interest rates—based on false information about that program or about interest rates. We are not in the interest rate prediction business; we are in the interest rate/credit market explanation business…so that clients and potential clients are well-armed with accurate information that will help them reach their own conclusions. (For us, nothing new here.)

Deceptions in marketing and advertising materials may be explicit and/or implied. “Whether an implied claim is made depends on the overall net impression that consumers take away from an advertisement, based on all of its elements (language, pictures, graphics, etc.). The FTC evaluates whether consumers’ impressions or interpretations of a representation or omission are reasonable.” Here, the room for judgment broadens, but the intention is to find deceptions that are implied but intended. Unintended deceptions, for the most part, are not culpable. The agencies involved, as recent documents assert many times, are not seeking to catch and punish individuals or groups who make unintended mistakes that could mislead clients. Again, though, great care is undoubtedly advisable.

Many alleged violations have been cited.  “The alleged violations have included deceptive claims—often made to subprime borrowers—about key terms and other aspects of the loans, such as:

• Misrepresentations of the loan amount or the amount of cash disbursed;

• Claims for loans with specified terms, when no loans with those terms were available from the advertiser;

• Claims of low ‘teaser’ rates and payment amounts, without disclosing that the rates and payments would increase substantially after a limited period of time;

• Misrepresentations that rates were fixed for the full term of the loan;

• Misrepresentations about, or failure to adequately disclose, the existence of a prepayment penalty or large balloon payment due at the end of the loan;

• Claims about the monthly payment amounts that the borrower would owe, without disclosing the existence, cost, and terms of credit insurance products ‘packed’ into the loan;

Claims that the loans were amortizing, when, in fact, they involved interest-only transactions;

• Claims of mortgage payment amounts that failed to include loan fees and closing costs of the kind typically included in loan amounts;

• False or misleading savings claims in high loan-to-value loans;

• False or misleading claims regarding the terms or nature of interest rate lock-ins;

• False claims that an entity was a national mortgage lender;

• Failure to disclose adequately that the advertiser, not the consumer’s current lender, was offering the mortgage; and

• False or misleading claims that consumers were ‘pre-approved’ for mortgage loans.

It's a fairly familiar ghoul's gallery of misrepresentations and it should give us a clearer idea of what the FTC and consumer protection agency are trying to stop.

“Numerous states also have brought enforcement actions under state laws alleging deceptive mortgage advertising and marketing, challenging misrepresentations about: (1) The lack of closing costs; (2) low fixed or teaser rates or payments; (3) the advertiser’s affiliation with the consumer’s current lender; (4) the availability of government grants for home repairs; (5) the savings available by refinancing; (6) reverse mortgage terms and government affiliation; (7) the availability of rates compared to competitors; and (8) the advertiser’s self-description as a ‘bank.’”

The relevant advertising or marketing pieces are known as ‘‘commercial communications’’:

"any written or oral statement, illustration, or depiction, whether in English or any other language, that is designed to effect or create interest in purchasing goods or services, whether it appears on or in a label, package, package insert, radio, television, cable television, brochure, newspaper, magazine, pamphlet, leaflet, circular, mailer, book insert, free standing insert, letter, catalogue, poster, chart, billboard, public transit card, point of purchase display, film, slide, audio program transmitted over a telephone system, telemarketing script, onhold script, upsell script, training materials provided to telemarketing firms, program-length commercial (‘‘infomercial’’), the Internet, cellular network, or any other medium. Promotional materials and items and Web pages are included in the term ‘commercial communication.’"

Anyone disseminating such “commercial communications” must retain copies for at least 24 months—partly for self-protection, so that you have the actual materials in question, should you need them. This is not legal advice, just a statement of personal preference: I think it is good to retain any marketing piece you send to anyone or any people, partly so that you can look up the piece a client might refer to, even when it’s many years old, and so that you can better track the effectiveness of your marketing materials. This will include printed and Internet materials that might not ordinarily be considered marketing pieces. Any descriptions or explanations of loan programs and lender services should be in your paper and/or electronic files.

And there it is. Not really worthy of great fear. It’s just another attempt to protect consumers (i.e., borrowers) and to make business run a bit more smoothly. And, as with all such attempts, there are inevitable problems that arise from the obvious fact that legislators cannot anticipate all problems and, even if they could, they wouldn’t be able to come up with truly workable solutions until the market gave the problems a specific context and character.

WednesdayWrap.2

The Wednesday Wrap--a little compendium of opinions and analyses of all matters, especially economics, related to real estate--came into existing in January, 1981. It was a 4-page report, typed up on an IBM Selectric typewriter, printed, stapled together, and delivered by hand to real estate and mortgage professionals in Southern California. I offered subscriptions to real estate agents, but they were used to getting things for free. So I soon was underwritten by a massive title insurance company.

What was truly great about this experience was that I got to know thousands of people in the business. I was in the business myself when I began writing the Wrap. I owned a medium-sized office in San Juan Capistrano, and tried out all the marketing and business techniques I wrote about in the Wrap. I also found out firsthand how the then-new Adjustable Rate Mortgage programs worked and gave seminars on the subject all over the state.

I met wonderful people in Santa Rosa, Mt. Shasta City, San Jose, Santa Clara, Stockton, Fresno, Bakersfield, and all over Southern California. And the Wrap soon went to a growing audience in other states as well.

Then the California Department of Insurance, in an attempt to squash every way that some title companies were apparently buying business, made it illegal for title reps to hand out the Wrap, even though it helped its readers provide their clients with better service. With this boulder tied around its neck, the Wednesday Wrap sank into the sea of oblivion.

But many people, as I am discovering, still remember the Wednesday Wrap and its mildly sarcastic, fun-loving, truth-telling researcher and writer, the "Wrapman." And so I'm back--with WednesdayWrap.2.

Let me say that there is a good reason for WednesdayWrap.2 to exist. The last time the Wrap looked like it would disappear, a lot of my favorite people in real estate were convinced that the Internet would eliminate real estate professionals completely. It was clear to me, however, that the Internet would enhance the public's awareness of the many reasons they would benefit from the assistance provided by a seasoned, caring real estate agent. So I started writing again.

This time, a lot of real estate and mortgage professionals, along with pesssimistic analysts, are certain that we're heading into another recession, and thinking they should find new careers. Once again, I disagree. We're not heading into a recession; we're in the midst of massive change in the industry. Indeed, the changes have just begun.

What I hope to do in the coming week as the WednesdayWrap.2 gets underway is (1) to point out the indicators that are telling us the markets (both the real estate sector and the overall economy) are indeed improving--though in unusual ways--and (2) to keep an eye on the best ways to involve ourselves in and profit from the changes now progressing in the industry. Most of us, perhaps understandably, have our eyes fixed on our rear view mirrors--where the landscape, though passing, is more recognizable. It's time, though, to learn to see the new world that is shaping itself before us.

A simple example: New home builders, who find it very difficult to compete with discounted foreclosure properties, are developing the various versions of the home of the future--smaller, energy-efficient, easily-kept up, inexpensively elegant, with every square inch used wisely. The effect that the success of these houses will have is impossible to overestimate, especially in a market so greatly defined by first-time buyers and Baby Boomers in their new, active retirements.

The new homes will persuade owners of existing homes to remodel so that they can compete with the increasingly popular styles.

This is exciting stuff, as are the coming changes in mortgage financing, the more effective ways of marketing homes, the expanded roles of real estate and mortgage professionals in every aspect of real estate transactions.

Welcome back to the WedWrap! Please bookmark this blog. I'll write you more at least once a week, and I'll look forward to your responses.

Yours,
Dr. Bill Fisher