Mortgage Shopper

Reverse Mortgages: Why Are Big US Banks Exiting The Reverse Mortgage Business

Bank of America and Wells Fargo are not only two of the biggest banks in the US, they are in the top 25 Enterprises in the World. So why have have left the reverse mortgage business within months of one another?

SImple Economics have driven Wells Fargo and Bank of America from the reverse mortgage business.

Both Wells fargo and Bank of America have ceased originating reverse mortgages because the economics of that loan product have come under pressure.

With the two biggest players originating nearly half of all reverse mortgages their departure will leave a big dent in seniors being able to take advantage of these loans in the US.

What are Reverse Mortgage?

It is where the bank buys back the equity of your home, and a method for senior home owners [62+], can supplement their retirement incomes in return for that equity.

Our homes are generally our biggest asset and if you are over 62 years old and require supplementary income to live on then a reverse mortgage may be an option you might wish to consider.

Reverse mortgages allow older homeowners to tap into their their home equity. Instead of the homeowner making repayments, the banks pay the borrowers.

As before, homeowners continue to pay rates taxes and insure and maintain the property. And that is the fly in the ointment. Because many homeowners cannot afford the home insurance and the rates and taxes and maintenance, so the banks risk holding an asset with a falling value and having to foreclose on seniors. Not a good look for a bank, though this is yet to happen currently.

And the other problem is the continued slide of home values in the US, and rising taxes for the homeowner to pay. As a result, banks have noticed a rise in "technical defaults", when homeowners fall behind on their taxes or homeowner’s insurance and maintenance, all of which need to be met to avoid foreclosure. About 5 % of reverse mortgages are apparently in default on at least one of those items.

Falling home prices mean less people can qualify for a reverse mortgage

Less borrowers can qualify right now in any event.  Because falling house prices mean that fewer properties will qualify for reverse mortgages. In many cases a loan modification would make more sense, to save the homeowners from foreclosure.

The final straw is that lenders cannot assess a borrower credit and ability to repay, so banks were flying blind in approving these loans. In fact a lender cannot decline the borrower, because the loan is deemed an asset loan, and as such based solely on the value of the property.

Why Reverse Mortgages used to be such a great idea for lenders and borrowers.

Before the Global Financial Crisis and mortgage meltdown in the US, the typical borrower would get the reverse mortgage, and equity in the home would continue to build as the asset value increased.

This would provide borrowers with more options — like refinancing — should they fall on hard times. Declining home values have changed that paradigm for both bankers and consumers. Borrowers have not been able to pull out as much money.

The final nail in the coffin for reverse mortgage loans

At the same time, the government has also tightened its withdrawal limits, and minimum equity levels. SO with house prices falling it means that the homeowners will get less if anything for a reverse mortgage. This looks like continuing as more home equity goes "under-water".

Both Wells Fargo and Bank of America will continue to service their existing reverse mortgages. Thye just will not originate more of these loans.

Where to go for a reverse mortgage now?

Finding a reverse mortgage lender will be more difficult, but not impossible. The exit of Bank of America and Well Fargo will be felt as they provided nearly half the loans. But the other players are expected to raise origination volumes to cover about half the shortfall. The other borrowers may miss out. For many of them the loan modification route may make more sense.

Housing : US proposes 20% minimum deposit to buy a home

Will a 20% down payment plan help or hinder the US housing recovery?

The Future of the American housing market is still unclear 4 years after the subprime bubble burst.

From that we know that things that were tried so far have:

1. Not worked,
2. Had limited success, or
3. Are not sustainable. 

What would a 20% deposit minimum mean to home buyers?

One thing we all know is that getting a home loan will no longer be a walk in the park for borrowers or for mortgage brokers.

First home buyers will be the first to suffer. They will have to be motivated to save a deposit, before they qualify for a home loan.

That will have several implications.

1. Less home buyers will mean lower demand and house prices.
2. First home buyers will build smaller homes.
3. Low income earners maybe precluded from homeownership.
4. Mortgage brokers will leave the industry, looking for an easier way to make a living. 
5. Home buyers will be more reluctant to pursue a home loan, and save the deposit, and that means that homes will be a lot cheaper. 

U.S. bank regulators decided to propose a high standard for home buyers to get the best mortgage rates:

• Only those who can make a 20 percent down payment and have not had problems paying mortgages in the recent past would be eligible for the lowest rates. 

What about mortgage insurance?

Well what about mortgage insurance? Think about it.

The lender was saying "I don't want this loan unless you the borrower stumps up insurance to protect me, the bank from you defaulting."

Is that in the lenders or borrowers interest? Some would argue both, because it meant that you did not have to save much by way of deposit. But it had the effect of allowing more buyers to enter the market and that meant more demand and higher prices. These meant that new home buyers had to pay more and that's what a higher deposit will prevent.

It also meant that easy finance, meant more home buyers, and more buyers meant higher demand and higher prices.

So to see how this would play out.

let's suppose that only people with clear credit and big deposits get cheap loans.

One of the key new regulations would require mortgage lenders to invest in the loans they make, so that if the loans went bad, the lender would suffer.

In the years leading up to the financial crisis, lenders could hand off loans, many of which were known to be high-risk or never to be repaid, to other companies at a discount.

By selling the risk to others, they could then continue to make even more risky loans risky loans till the deal went toxic.

The twenty percent rule and a rate for risk scenario

But these rules would exempt banks from having to retain risk in loans made to borrowers who can offer a 20 percent deposit.

They also would exempt Government guaranteed loans, such as by federal-backed mortgage companies Fannie Mae and Freddie Mac.

What's wrong with the 20% deposit rule?

Home buyers’ advocates have criticized the 20 percent down payment rule.

Regulators had considered mandating a 10 percent down payment and this seems to have had broader support.

1. Many feel that a 20% deposit, and clear credit rule combination maybe too steep an ask for people to save, especially first home buyers.
2. Second home buyers can do this on the equity in the home, if there is any in the US housing market right now. 
3. The 20 percent requirement might preclude banks from making any loans that are not Government Guaranteed. 

Summary

There up to eight different proposals in bills that are trying to resolve the US mortgage industry and revive the housing market.

One thing is for sure. It was a lot easier thing to trash the US finance markets than it is to find a solution.

But all solutions point to making credit harder to lend or borrow. That will have to mean that house prices will be lower for some time to come. In the end home buyers and eventually first home buyers will be better off. But homeownership will become harder to initiate in the years ahead, but an easier thing to continue. In the end, it will be worth it.

US Housing market and bank profit losses forces the US dollar to record low against the Euro

The US dollar touched a new record low against the euro in Asian trade today, hit by jitters about the US housing market troubles caused by subprime lending problems for banks, and recent falls in global share prices, dealers said.

The euro rose to as high as 1.3845 US dollars in early Tokyo trading, just beating its previous all-time best of 1.3843 seen on Friday.

By late morning in Asia, the euro stood at 1.3830 US dollars, up from 1.3820 on Friday in New York.

The dollar was at 120.93 yen, close to a six-week low, after 121.26 in New York. The euro eased to 167.21 yen from 167.70.

"The dollar remains weak because of concerns about the US housing market and worse-than-expected corporate earning reports which weighed on stocks," said Kikuko Takeda, currency research manager at the Bank of Tokyo-Mitsubishi UFJ.

Disappointment over company results and worries about problems in the US sub-prime mortgage sector – loans to homeowners with patchy credit histories – caused sharp falls on global equity markets on Friday.

Dealers said the falls were affecting carry trade as investors grow more risk averse.

Carry trade is a risky but popular practice of borrowing money in countries with low interest rates such as Japan and investing in countries with high interest rates such as Australia or Britain.

Many Japanese have also been sending their savings overseas in search of higher returns than at home where interest rates remain very low.

Some analysts expect this trend to continue and see the recent rise of the yen against the dollar as a temporary correction, while others believe the outlook for the greenback is worsening due to the sub-prime woes.

Japan's financial markets are keeping a close watch on political events this week ahead of Sunday's upper house election, with polls showing Prime Minister Shinzo Abe's ruling party heading for heavy losses.

A bad result would not automatically cost Abe his job as the ruling coalition enjoys a majority in the more powerful lower house, but it would likely bring pressure on the premier to step down.
Source: Agence France Presse

Home bliss. When downtown meets waterfront and the price is right

Jodi Cunningham, a 48-year-old single mother from Jericho, spent two years shopping for a house she could afford, scouring the market in Plainview, Syosset and Jericho for a half-million-dollar home that didn’t need extensive repairs. “I was really disappointed in what I was seeing,” Ms. Cunningham said. In March, she found what she had been looking for: a new 2,200-square-foot colonial for $550,000. It is on a tidy street in Glen Cove, a city of more than 26,000 on the North Shore of Nassau County.

Dream Come True

And to Ms. Cunningham, “it is a dream come true.” For those home hunting without the deepest pockets, Glen Cove is like that — on the water, no less, and with an appealing variety of places to live. More ethnically and economically diverse than many communities on the North Shore, this seven-square-mile city dead-ending at Long Island Sound has not only marinas and beaches but also a bountiful mix of estates, single residences, two-family homes, town houses, condominiums, co-ops and rental apartments. It is also a city with a downtown in transition — a place seeking to shed elements of its long early history as an industrial center. Officials and developers are currently debating what to do with a 56-acre former industrial site essentially blocking the city’s downtown area from the waterfront.

Talk to Donald Monti, a partner in the Glen Isle Development Company, and he depicts the former brownfields Superfund site — reclaimed from World War II era metals processing pollution — as “a jewel waiting to happen.” His developer’s-eye-view includes 860 residential units in tiered midrise buildings set against a wooded hillside, along with a luxury hotel, spa, offices and retail shops, marinas, museums and perhaps even a culinary and wine school. The land, however, belongs to the city’s Industrial Development and Community Development Agencies, whose chairman is the mayor, Ralph V. Suozzi.

As enthusiastic as Mr. Monti is, Mr. Suozzi obviously doesn’t feel the same way. He recently described the Glen Isle project — which has been on the drawing board since 2003 — as currently in a “wait mode.” Mayor Suozzi, a cousin of the Nassau County executive, Thomas R. Suozzi, said he was concerned not just about issues like height, density and traffic, but also about whether the developers, who have invested $6 million of their own, have been straightforward. “What they have been showing to the planning board and the public is different than what they were contracted for,” he said. “I am for developing the waterfront, but that doesn’t mean do what you want.” Initially, the mayor added, plans had called for “a Mystic Seaport style waterfront experience,” with only commercial and retail uses. But shortly before he took office last year, a zoning change allowed a larger residential component.

The mayor contended that the model the developers used to facilitate the zoning change was different from the current renderings. Mr. Monti acknowledged that the revised plan included less retail space but described it as “designed to complement the existing downtown areas.” The smart-growth building plan also leaves 25 percent of the site as open space, he said. He predicted that the city, which is in financial straits, stood to gain $20 million a year in tax revenue from the project.

County Executive

Suozzi — who as mayor of Glen Cove during the late 1990s was the initiator of the waterfront cleanup efforts — emphasized the need to avoid a stalemate on the plan, recommending that his cousin the mayor and the Glen Isle developers open a dialogue. “The waterfront must be developed,” the county executive said. “Residential will make economic sense and will make it a more vibrant, sustainable community for the long term.

The only problem is the current proposal is simply too big.” As for the mayor, he says he is working on a new master plan, to be completed by September. Since March 2006, a moratorium on new subdivisions has been in place. For now, aside from a waterfront esplanade built by the city in 2003, the only tangible progress is the nearly completed Charles Street bridge, part of a new roadway near the intersection of Glen Cove Avenue and Pratt Boulevard that makes the waterfront area directly accessible from downtown.

But Mayor Suozzi remains unconvinced that the new roadway will do much to avoid any traffic crunch. What You’ll Find An estates area runs north of Forest Avenue, following Dosoris Lane to the Sound, with Gold Coast mansions — some now converted to hotels, schools and parks — along Crescent Beach Road. About 130 homes occupy East Island, formerly called Morgan Island after its owner, the financier J. P. Morgan.

In the more densely populated southern parts of town like the Orchard and the Landing, the city has ramped up its code enforcement in response to illegal subdivision of homes by immigrants. “We are being more aggressive about it,” Mr. Suozzi said. The city has a center for Hispanic laborers looking for work. Downtown shopping areas along School and Glen Streets bustle with activity, with a multiplex, restaurants, salons, banks, professional offices and a Staples. Francine Ferrante, executive director of the Glen Cove Downtown Business Improvement District, said the vacancy rate was about 10 percent. “We have been getting new businesses opening up fairly consistently,” Ms. Ferrante said, noting that national retailers were shy of Glen Cove because of its location at the tip of a peninsula. What You’ll Pay Compared with surrounding communities, Glen Cove is a relative bargain. “Prices are 10 to 15 percent lower for comparable homes than a Locust Valley or Lattingtown,” said Suzanne Wehren, an agent with Daniel Gale Associates in Locust Valley. Prices range from $365,000 for a three-bedroom, two-bath town house, to $19.5 million for the 20,000-square-foot former F. W. Woolworth mansion; most top-tier homes are in the $2 million to $4 million range.

Ms. Cunningham, the single mom who recently found her dream house, ascribed some of her luck to a market glut. According to Mishelle Berger, the sales manager at Sherlock Holmes Realty in Glen Cove, there are 199 homes on the market. The median price, $650,000, hasn’t changed, but last year at the same time, there were 110 homes for sale. Rentals, a rare commodity in Long Island suburbs, are available in Glen Cove. The Avalon Glen Cove North, an upscale complex, opened downtown in mid-April. The 111 apartments range from studios to two-bedrooms, according to Terese Santoro, a manager. Rents range from $1,650 to $3,000 a month. Amenities include a heated swimming pool, fitness center and 24-hour concierge. The building, up the block from the three-year-old Avalon Glen Cove South, is more than 50 percent leased.

Life's a beach, and more

There are three resident-only beaches — Crescent, Pryibil and Morgan Memorial Park — as well as marinas and nine parks. The municipal Glen Cove Golf Course has 18 holes, and views of Dosoris Pond and Long Island Sound. Residents pay $75 a year for a permit, and green fees in the $20-to-$30 range, depending on the time of the week. Nonresidents can join for $875 a year. The club also has a restaurant, driving range, pistol range, tennis courts and a playground. The 62-acre Garvies Point Museum and Preserve, a county-owned Native American archaeology and regional geology museum, has five miles of nature trails.

The Commute

Tucked at the northern tip of central Nassau County, Glen Cove is 27 miles from Manhattan. The Long Island Expressway is a 10-minute ride away, down Route 107 and Glen Cove Road. The Long Island Rail Road makes three stops inside city limits on the Oyster Bay line: Sea Cliff, Glen Street and Glen Cove. The 6:16 p.m. express from Pennsylvania Station takes 59 minutes to the Glen Cove station at Pearsall Avenue and Duck Pond Road. Monthly tickets are $203, slightly less online. The Schools Forty percent of the 2,900 students in the Glen Cove School District are Hispanic, 14 percent are African-American and 4 percent are Asian. Mean SAT scores for the class of 2006 were 458 for critical reading, 475 for math and 445 for writing, versus state scores of 510, 493 and 483.

The district is embarking on an international baccalaureate program for students seeking college-level work. State English Language Arts scores for Grades 3 through 8 have been improving. Eighth graders, for instance, scored 23 points better than last year: 72 percent passed in 2007, versus 49 percent in 2006. Among the private schools in the district are the Solomon Schechter Day School of Nassau County and High School of Long Island, a Conservative Jewish middle and high school; All Saints Regional Catholic School for nursery through Grade 8; and Friends Academy for preschool through Grade 12. The History In the 1890s, Charles Pratt Sr., a co-founder of Standard Oil, bought 1,100 acres on Glen Cove’s northwestern waterfront and gave land to each of his six sons, according to Paul J. Mateyunas, the author of “North Shore Long Island: Country Houses 1890-1950” (Acanthus Press 2007). Each built his own mansion. Among them is the Glen Cove Mansion, a hotel and conference center that was originally home to John Teele Pratt Sr. Also, what was Harold I. Pratt’s Welwyn, built in 1913, is home to the Holocaust Memorial and Tolerance Center and Children’s Memorial Garden. A Snapshot Glen Cove’s diversity makes it a standout among North Shore communities.

Going Forward

The city is considering a new ferry terminal along Garvies Point Road, which would offer a water route to Manhattan. But without more commuters, or tourists who might be drawn to the Glen Cove waterfront by a project like Glen Isle, water service to the city may not have much of a shot.

Source: New York Times

Building a house in Manhatten, means finding an empty lot for sale

Finding a Vacant Lot to Buy. At first, that didn’t occur to Keith Strand. After all, who builds a house in Manhattan?

But when he could find no affordable houses to renovate, he did what an architect would do. He abandoned the hunt for a house and instead went looking for a plot of land to build on.

Mr. Strand, 53, who grew up in Colorado Springs, first came to New York in the 1970s with the group Volunteers in Service to America to work on Bronx housing projects. He met his wife, Cydney, 58, who is from St. Louis, through her former husband, who was also a Vista volunteer.

When the Strands married in 1991, they rented in Fort Greene, Brooklyn. They also owned a two-acre wooded plot in Dover, Vt., where they spent four months building an environmentally friendly summer cabin.

They could afford to buy a home only if they received rental income, so they bought a two-family town house in Clinton Hill for $125,000. They set out to renovate the entire place, never quite finishing, and giving their tenants a break on the rent for tolerating endless construction.

The Strands found themselves property rich and cash poor. “We had this huge asset but not much money,” said Mr. Strand, whose architectural practice specializes in renovations, conversions and office interiors. He said the house had “gone up so much in value” that they planned to sell it and move to Brattleboro, Vt., near their cabin, where they garden and play golf. But when negotiations for a house there fell through, they changed their minds and decided to stay in New York. This time, they looked for a way station while they concentrated on finding another house, preferably in Manhattan, where neither had lived.

“I am always ready for change,” said Ms. Strand, an educator for Lighthouse International, which helps those with impaired vision. “Staying in one place is hard for me.”

In 2002, they sold the Clinton Hill home for $740,000 and bought a two-bedroom wreck in a condominium building in the Mount Morris Park Historic District in Harlem for $170,000. Mr. Strand spent six weeks making it habitable.

It wasn’t easy to downsize. They immediately began hunting for a bigger home in the neighborhood, which they loved, with its wide streets and welcoming neighbors.

“Keith kept saying, ‘Don’t worry, it’s just temporary,’ and I am watching property values skyrocket, saying, ‘How is it temporary?’ ” Ms. Strand said. “They were beyond our price already. I was sure we just missed the boat.”

At that point, $500,000 to $600,000 bought a 15-foot-wide brownstone shell, Mr. Strand said. He calculated that restoring one would cost more than buying a house in livable shape.

In his old neighborhood, he had created a two-story house from a tire-repair garage for clients who had bought the garage for $200,000. He figured he could buy a similar structure in Harlem.

“There are a fair number of one-story carriage houses, and I basically walked around looking in the neighborhood for those types of buildings,” he said. Many were occupied by small churches. He found only one for sale, a little brick box with a missing roof on West 123rd Street.

A man outside was filling a Dumpster. Mr. Strand had assumed a recent buyer was cleaning up. But a for-sale sign was soon posted. The carriage house was attached to the brownstone next door. The owner, seeking $1.6 million, refused to split the properties.

What he needed, Mr. Strand realized, was a vacant lot. Starting from scratch would let him build just what he wanted, in an environmentally sensitive way.

Vacant lots were advertised as “investment properties.” Fifteen-foot-wide lots, many filled with trash or weeds, were selling for $150,000 to $275,000. Some lots, at 50 by 100 feet, were too large. Others were too shallow.

A plot on Manhattan Avenue near 123rd Street had possibilities, but a large tree in front interfered with plans for a one-car garage. Regulations from the Department of Parks and Recreation strictly govern the removal of street trees.

His wife disliked some of the plots. “Keith does all the legwork and then drags me out at the end to say, ‘What do you think?’ ” she said. “My input is all touchy-feely. I don’t do any of the rational stuff.”

Ms. Strand had only one hesitation when it came to a 15-by-100-foot lot on the same block as the carriage house, available for $159,000. How could a house possibly fit into that skinny space? But Mr. Strand noted that their living room was 14 by 16 feet. He knew he could work with the size. The Strands first offered $120,000, before buying the lot for $150,000 in June 2003. “I was, like, who else would want this?” Mr. Strand said.

They found out a few months later. There were two vacant lots, each 15 feet wide, adjacent to theirs. The owner of those found investors who wished to combine all three lots and build a larger building on the 45-foot-wide parcel. Mr. Strand was willing to sell for $450,000 if he could find an alternate lot to build on. But there were none, even at that price. “I did scour the neighborhood and noted any vacant lots that I saw,” he said. “A lot were attached to buildings in some way, either for parking or easements.”

Finding a Vacant Lot to Buy. One possibility was a lot on West 124th Street that is informally used as overflow from an adjacent Green Thumb community garden. “No way I am going to be the guy who goes in” and impinges on a Green Thumb site, he said.

Ms. Strand didn’t want to sell at all. “For what?” she asked. “To buy another property we didn’t like as much to make the developers happy? I didn’t like those other properties once I got used to this one. I had already adopted it as my block.”

So they went ahead with the construction. It took nearly two years before their home was habitable. Including the land, they spent a total of $900,000. They sold the condominium for $486,000 and relocated two blocks away last fall. For several weeks they had no gas or hot water, and showered at the gym or at friends’ homes.

“Cyd made me promise she would never live in a construction site again,” Mr. Strand said. “I seem to be unable to keep that promise.”

Some old-timers on the block remember the three identical brownstones that once stood on the parcels. The Strands assume the house that was on their lot had burned down. The remnants of the stone foundation are incorporated into their concrete foundation.

Now, their 15-by-70-foot three-story house has radiant heat throughout, a garden in back, and a gabled roof with solar panels that produce about 20 percent of the house’s electricity. Mr. Strand’s office is on the ground floor, as is a garage just big enough for their car.

Leaving from Harlem, the drive to Vermont is 45 minutes shorter.

“When you live with an architect, the house is never finished,” Ms. Strand said. They have yet to panel the entry hall of their new house. The Harlem house proves that “a small-scale project can be conserving and beautiful at the same time,” Mr. Strand said.

Source: New York Times

Australia's run away growth might drive up home mortgage interest rates

Mortgage interest rates may rise this year if Westpca Bank's tealeaf readers are right that Australian economy will power ahead over the next nine months helped by strong consumer spending and people working longer hours caused by skilled labour shortgages, a report shows.

But stronger growth is expected to lead to one more home loan interest rate rises, according to Westpac Bank. [It will of course be also dependent on other factors including fuel costs and inflation outcomes which appear to be trending lower.]

In November the Westpac/Melbourne Institute leading index of economic activity index climbed 1.3 points, bringing the annualised rate of growth to 6 per cent, well above its long term trend of four per cent.

Each of the four quarterly components increased, with overtime worked and the real money supply making the largest positive contributions to the annualised growth rate of the index in November, the report showed.

The annualised growth rate of the coincident index was 3.7 per cent, also above its long-term trend of 3.3 per cent.

The leading index indicates the likely pace of economic activity three to nine months into the future.

Westpac chief economist Bill Evans said this was the fastest annualised growth rate of the index since February 2000, with the index now above trend for most of 2006.

"It continues to point to a solid pick up in economic growth in the first half of 2007," he said.

Westpac said growth was expected to accelerate to 3.2 per cent during the year to November 2007, up from 2.2 per cent in the year earlier period.

Mr Evans said the index was not capturing much of the impact of the November interest rate hike or the impact of the expected increase in February.

"However it is telling us that without these policy responses Australia's growth recovery would be strong, probably putting excessive pressure on inflation which is already at the top of the Reserve Bank's comfort zone," he said.

"The key aspect of our growth forecasts are a consumer maintaining solid but below average spending pace, residential building entering another modest down cycle in response to higher interest rates, business investment remaining at very high levels but showing little new growth and strong export growth," he said.

The Reserve Bank board meets on February 6 and economists are split on whether they will hike rates gain.

Mr Evans expected the bank to lift rates one more time by 25 basis points in response to the three prior hikes in 2006 only making a moderate impact in inflationary pressures.

The definitive evidence on the inflation front would come with next week's consumer price index (CPI) report for the December quarter.

"As we have stressed in the past the rate hike decision will be contingent on evidence that underlying inflation pressures remain too higher," Mr Evans said.

"The leading index provides some support to the higher inflation view pointing to rising activity which would put further pressure on capacity, which is already stretched."

Source: AAP

BUILDER'S CONFIDENCE IN CONDO MARKET DIPS AGAIN IN SECOND QUARTER ACCORDING TO NEW MULTIFAMILY INDEX

Builder confidence in the condominium housing market weakened significantly in the second quarter of 2006, as sales continued to retreat from the record-high levels seen last year, according to results from the National Association of Home Builders Multifamily Condo Market Index* (MCMI) released today.

“Investors and speculators had been a big factor driving sales and production at the height of the condo boom and they have been pulling out of the market,” said NAHB Chief Economist David Seiders, “What we are currently seeing is a level of condo production that is probably more sustainable in the long run, although builders are worried that affordability has also become a factor for buyers, now that the overall economy appears to be slowing.”

The component of the MCMI that tracks current condo supply conditions fell to an index value of 32.0, compared to a value of 61.3 during the second quarter of last year. It was the third time since NAHB began tracking this data that the for-sale index has fallen below 50. A rating of 50 generally indicates that the number of positive responses is about the same as the number of negative responses.

The MCMI is a quarterly, nationwide survey of multifamily builders and property owners who are asked a series of questions about market conditions as well as their expectations for the next six months. Survey answers are assigned numerical values to calculate two separate indexes, one tracking rental demand and the other tracking supply conditions for rental and for-sale units. The index gauging builder sentiment about condo production over the next six month also declined, down to 34. The scale is from 0 to 100.

Two new questions were asked in this quarter’s survey, both designed to gauge aspects of condo demand. The first asked builders about the volume of traffic they are seeing from prospective buyers. The survey response stood at an index value of 26.8, indicating that more respondents believed that traffic was lower than in the previous quarter. The second question surveyed condo builders about the asking prices on new units resulting in an index value of 46.3—indicating that prices are softening to some degree.

In a set of special questions for condo developers, 82 percent said they had noticed buyer resistance to current prices and, of these, more than one-fourth reported that they have reduced prices. The average price cut was 9 percent.

About three-fourths of the respondents said they are using non-price incentives to boost sales and limit cancellations. Two-thirds of those builders who reported using incentives are including optional items at no cost, a third are absorbing financing points, and two-thirds are paying closing costs or fees to bolster sales. Half the developers are using agents or brokers to help sell, up from about 20% a year ago.

*Formerly the for-sale component of the Multifamily Market Index (MMI). In 2002, NAHB created the Multifamily Market Index (MMI), a quarterly, nationwide survey of multifamily builders and property owners who are asked a series of questions about current market conditions as well as their expectations for the next six months, and has been conducting the survey on a quarterly basis since then to track builder confidence in both the for-sale condo market and the rental apartment market. To more accurately gauge both segments of the market, NAHB has separated the indexes into versions that will be released separately: the Multifamily Condo Market Index (MCMI) for condominiums, and the Multifamily Rental Market Index (MRMI) for rental apartments.

Source: National Association of Home Builders