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The real reason the US economy is starting to improve

“The real reason the US economy is starting to improve”

AP Photo / Chris O’Meara

New construction soared 15% in September. Look for real estate to keep improving, which will create housing-related jobs.

Is the latest improvement in unemployment a statistical fluke, a political conspiracy or the start of something real? The answer, obvious to anyone paying attention to the US housing market, is that it’s real. Just look at this morning’s new construction numbers—a 15% increase in September, the best performance in more than four years.

Economic news will be saw-toothed through the winter, but the real estate industry is finally starting to create jobs, and will keep doing so in 2013, regardless of who becomes the next US president.

No one at this point is even arguing that real estate has rebounded. Last February, Redfin was one of the first to call the bottom, at a time when others were still revising their 2012 forecasts downward.

Now, Goldman Sachs predicts that home prices will increase 2% over the next 12 months, rising another 2.8% the year after that. JP Morgan CEO Jamie Dimon said on Friday that housing has turned the corner. Only 11% of consumers now expect home prices to decline.

US banks have already benefited, both from increased mortgage applications and fewer real-estate-related write-downs, with the biggest two reporting record profits. The only questions now are whether it will last and what it means for the overall economy. On the ground and in national statistics across the board, we see ample evidence that prices recovered in 2012, and now expect that sales–and jobs—will follow suit.

Why real estate jobs matter

The reason real estate leads America in and out of recessions—of the 14 times American home prices have declined, 11 have resulted in a recession—is because it employs so many people in so many places, contributing as much as 18% of the gross domestic product. The US has more than 1 million licensed real estate agents but less than half that have recently served a customer. The construction industry has lost roughly 2 million jobs in the past five years, mostly due to the real estate crash. Many of these folks struggle to find jobs in other industries.

Because of trade deficits, electoral politics and nostalgia, we talk almost exclusively about the ebb and flow of manufacturing in Michigan and Ohio, but the auto industry’s impressive recovery has only added 250,000 jobs. Even a modest increase in real estate jobs can swing the economy even further, reaching every corner of the country. Any town big enough to have a gas station and a pizza parlor usually has a real estate office, with plenty of empty desks. This is why an uptick in real estate sales has far-reaching effects.

Breaking ground on big projects

One of the first sectors to add jobs will be construction. The reason builders have had a great year in 2012 is because they’ve been able to build more without hiring more. Skeleton crews finishing off half-built projects—often bought for pennies on the dollar from bankrupt competitors—haven’t added many jobs. It takes fewer cooks to prepare leftovers for dinner.

But now the builders are hiring big teams to break ground on new projects; housing starts are up 29% over last year. The Federal Reserve just reported not only strengthening home sales, but more construction across most of the country. In almost every American city, there are more cranes in the sky and holes in the ground, and more jobs.

Rising prices don’t create jobs, sales do

So why has it taken so long for real estate to contribute to a recovery? Prices rose this spring due to demand, but sales lagged. And sales are what matter most, putting money in the pockets of brokers and builders.

It’s hard for sales to increase more than a few points when inventory is down 29% from last year. The Federal Reserve spurred demand with record-low interest rates, throwing a party for the real-estate industry that many sellers decided to skip.

So when will sellers and buyers hook up? The truth is that there’s always a lag. When real estate prices first start to move up, builders hesitate to build and sellers hesitate to sell. As in other cyclical industries, it takes most of a year just for everyone to believe it’s real.

The end of the foreclosure era

The first inflection point came in 2011, with stabilizing prices. Prior to that, banks were still the market-makers in most cities, controlling inventory levels and setting prices through sales of foreclosures. But then last fall, the number of foreclosures for sale began to drop steeply; few individual home-owners were willing to pick up the slack by listing their own home, especially at the prices set by the banks. Inventory fell so far so fast that we soon began to see bidding wars, and prices stabilized.

Eventually rising prices will bring sellers back to the market. Every day this year, Redfin agents have been meeting regular people to discuss whether to list now or hold off in the hope of a higher price next year. Many, at our encouragement, have been holding off.

If you think we’re anywhere near the bottom, and you don’t mind waiting, why sell now? The inventory crunch has been compounded by rising rents and falling interest rates. In most American cities you can easily find a renter willing to pay your monthly mortgage and then some.

Shadow demand: Hundreds of thousands of buyers waiting for inventory

We believe the sellers will start to come out in greater numbers next year. Waiting for them will be hundreds of thousands of would-be US home-buyers, who are now headed toward the holidays frustrated at having failed to find a listing in 2012. We think of these buyers as a source of shadow demand, perhaps not of the same magnitude as the shadow inventory one held back by the banks but very large.

Already in the shoulder season before Thanksgiving, we’re seeing plenty of “domino listings,” where one home-owner puts his house on the market and immediately gets a sale, emboldening his neighbor to follow suit.

More significantly, 2013 will be the first year in the last seven that will begin with a broad consensus that home prices are rising. Inventory has already started to increase in at least one market, Phoenix, as higher prices there induce owners to sell. As more listings appear nationwide next January, more sales will follow.

Return of the flips

Another more subtle change is driving employment: the amount of money people are putting into the homes they buy and sell. Economists often talk about home prices in abstract terms, as if people were simply paying less in 2010 for the exact same asset that sold in 2005.

But in fact, Americans stopped putting money into homes over the past six years. Hard-nosed buyers stopped falling in love with finishes, and just did the math on how much they were paying per square foot. And sellers took note. Banks selling off their foreclosures stopped mowing the lawn, much less renovating the kitchen. The value of American real estate plummeted in part because America itself just started to look shabbier.

That’s changing. Builders are trying to justify higher appraisals with expensive add-ons. In markets like Washington D.C. and Orange County, California, we see homeowners investing in a new kitchen or an extra bedroom and convincing themselves they’ll recoup part of the cost next year in a sale. Investors are pouring $50,000 into a home so they can sell it for an extra $200,000. This means that carpenters, electricians, plumbers and builders are getting more work and staying off the dole.

Employment will improve next year because more of these folks—and more real estate agents, lenders, inspectors and appraisers too—will have jobs. This doesn’t mean real estate will grow to the proportions it had at the height of the Bush-era bubble, when it was two and a half times larger than it is today. But it does mean that things will get much better. In fact, it’s why they already have.

We welcome your comments at ideas@qz.com.

The real reason the US economy is starting to improve
By Glenn Kelman
Glenn Kelman is the CEO of Redfin, a technology-powered real estate broker. Previously, he co-founded Plumtree Software, with a 2002 IPO.

Categories
Economy Personal Finance Real Estate

Americans brace for next foreclosure wave

(Reuters) – Half a decade into the deepest U.S. housing crisis since the 1930s, many Americans are hoping the crisis is finally nearing its end. House sales are picking up across most of the country, the plunge in prices is slowing and attempts by lenders to claim back properties from struggling borrowers dropped by more than a third in 2011, hitting a four-year low.

But a painful part two of the slump looks set to unfold: Many more U.S. homeowners face the prospect of losing their homes this year as banks pick up the pace of foreclosures.

“We are right back where we were two years ago. I would put money on 2012 being a bigger year for foreclosures than 2010,” said Mark Seifert, executive director of Empowering & Strengthening Ohio’s People (ESOP), a counseling group with 10 offices in Ohio.

“Last year was an anomaly, and not in a good way,” he said.

In 2011, the “robo-signing” scandal, in which foreclosure documents were signed without properly reviewing individual cases, prompted banks to hold back on new foreclosures pending a settlement.

Five major banks eventually struck that settlement with 49 U.S. states in February. Signs are growing the pace of foreclosures is picking up again, something housing experts predict will again weigh on home prices before any sustained recovery can occur.

Mortgage servicing provider Lender Processing Services reported in early March that U.S. foreclosure starts jumped 28 percent in January.

More conclusive national data is not yet available. But watchdog group, 4closurefraud.org which helped uncover the “robo-signing” scandal, says it has turned up evidence of a large rise in new foreclosures between March 1 and 24 by three big banks in Palm Beach County in Florida, one of the states hit hardest by the housing crash

Although foreclosure starts were 50 percent or more lower than for the same period in 2010, those begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo’s rose 68 percent and Bank of America’s, including BAC Home Loans Servicing, jumped nearly seven-fold — 251 starts versus 37 in the same period in 2011. Bank of America said it does not comment on data provided by other sources. Wells Fargo and Deutsche Bank did not comment.

Housing experts say localized warning signs of a new wave of foreclosure are likely to be replicated across much of the United States.

Online foreclosure marketplace RealtyTrac estimated that while foreclosures dropped slightly nationwide in February from January and from February 2011, they rose in 21 states and jumped sharply in cities like Tampa (64 percent), Chicago (43 percent) and Miami (53 percent).

RealtyTrac CEO Brandon Moore said the “numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed.”

One big difference to the early years of the housing crisis, which was dominated by Americans saddled with the most toxic subprime products — with high interest rates where banks asked for no money down or no proof of income — is that today it’s mostly Americans with ordinary mortgages whose ability to meet payment have been hit by the hard economic times.

“The subprime stuff is long gone,” said Michael Redman, founder of 4closurefraud.org. “Now the folks being affected are hardworking, everyday Americans struggling because of the economy.”

“HARD TO CATCH UP”

Until December 2010, Daniel Burns, 52, had spent his working life in the trucking industry as a long-haul driver and manager. When daily loads at the small family business where he worked tailed off, he lost his job.

Unable to cover his mortgage, Burns received a grant from a government fund using money repaid from the 2008 bank bailout. That grant is due to expire in early 2013 and Burns is holding out on hopeful comments from his former employer that he might get his job back if the economy recovers.

“If things don’t pick up, I will be out on the street,” he said, staring from his living room window at two abandoned houses over the road in the middle-class Cleveland suburb of Garfield Heights, the noise of traffic from a nearby Interstate highway filling the street.

Underscoring the uncertainty of his situation, Burns’ cell phone rings and a pre-recorded message announces that his unemployment benefits are due to be cut off in April.

A bit further up the shore of Lake Erie, Cristal Fell, who works night shifts entering data for a trucking company in Toledo, has fallen behind on her mortgage a second time because her ex-husband lost his job and her overtime was cut.

“Once you get behind it’s so hard to catch up,” she said.

Fell, a mother of four, hopes the economy will gather enough speed to help her avoid any risk of losing her home. Her ex-husband has found a new job and she is getting more overtime, so she hopes she can catch up on her mortgage by the fall.

Burns and Fell are the new face of the U.S. housing crisis: Middle class, suburban or rural with a conventional 30-year fixed mortgage at a reasonable interest rate, but unemployed or underemployed. Although the national unemployment rate has fallen to 8.3 percent from its peak of 10 percent in October 2009, nearly 13 million Americans remain jobless, meaning many are struggling to keep up with their mortgage payments.

Real estate company Zillow Inc says more than one in four American homeowners were “under water” or owed more than their homes were worth in the fourth quarter of 2011. The crisis has wiped out some $7 trillion in U.S. household wealth.

“We’re seeing more people coming through who have good loans with reasonable interest rates,” said Ed Jacob, executive director of non-profit lender Neighborhood Housing Services of Chicago Inc, which provides foreclosure counseling. “But in many households only one person works now instead of two, or they had their hours cut.”

“The answer to the housing crisis now is job creation.”

EARLY SIGNS OF UPTICK?

Zillow expects the resurgence in foreclosures this year, combined with excess inventory of unsold, bank-owned homes will contribute to a 3.7 percent national decline in prices before the market hits bottom in 2013 and stays there until 2016.

“The hangover from this crisis will far outlast the party of the boom years,” said Zillow chief economist Stan Humphries.

Getting through the remaining foreclosures and dealing with the resulting flood of homes on the market in the wake of the bank settlement is a necessary part of the healing process for the U.S. housing market, he added.

According to leading broker dealer Amherst Securities, some 9.5 million homes are still at risk of default and in February it said it expected to see the uptick in foreclosures start to hit in March and April.

There is other evidence that many of the foreclosures that did not happen in 2011 will happen this year.

A January report by the Neighborhood Economic Development Advocacy Project in New York found that in the first half of 2011 the number of 90-day pre-foreclosure notices in New York City outnumbered court foreclosure actions by a ratio of 14 to one, indicating that while proceedings were initiated against many homeowners, they were left incomplete.

“Now the banks have a settlement, foreclosure numbers for 2012 are going to be high,” said NEDAP co-director Josh Zinner.

A recent survey by the California Reinvestment Coalition, an umbrella group of nearly 300 non-profit groups in the state, of member agencies found 75 percent of respondents expected increased demand for their foreclosure prevention services in 2012 but more than a third had to scale back services because of funding cuts.

“Funding is a major concern given what our members expect for this year,” said associate director Kevin Stein.

All this has non-profits intensifying calls for the Federal Housing Finance Agency to drop its opposition to allowing the government-backed mortgage giants Fannie Mae and Freddie Mac it regulates to reduce principal for underwater homeowners.

Principal reduction involves reducing the amount borrowers owe in order to make a loan modification affordable for struggling homeowners. Republicans and the FHFA oppose principal reduction because of the risk of “moral hazard”- that homeowners who do not need help will seek to abuse largesse and have their mortgages reduced too.

ESOP in Ohio engages in “hits” on Chase branches — they say Chase is the least accommodating major bank when it comes to working with struggling homeowners — where they try to hand letters to bank mangers calling on chief executive Jamie Dimon to lobby FHFA head Edward DeMarco for principal reductions. A Chase spokeswoman said the bank has made “extensive efforts” to work with homeowners, helping 775,000 borrowers stay in their homes since early 2009, avoiding foreclosure “more than twice as often as we have had to foreclose.” Housing groups like ESOP maintain, as they have throughout the housing crisis, that unless the FHFA embraces widespread principal reduction, many more under water borrowers face losing their homes.

“Until banks engage in meaningful principal reduction as a matter of course,” ESOP’s Seifert said after a recent protest at a Chase branch in Cleveland, “this crisis will not end.”

(Reporting By Nick Carey; Editing by Martin Howell and William Schomberg; Desking by Andrew Hay)

By Nick Carey
GARFIELD HEIGHTS, Ohio

Categories
Economy

Avoiding Foreclosure Scams

At the end of the day, what many people crave most is the coziness of their homes and the company of family. It may take years to build your dream home and fill it with your family’s memories, but it only takes a few missed mortgage payments to take away your dream home. Foreclosure is every homeowner’s living nightmare. In this article, we will go through the essential steps required to prevent foreclosure and also how to stay away from being victimized by foreclosure scams. (For related reading, see Are You Living Too Close To The Edge?)

SEE: Mortgage Basics

The Foreclosure Nightmare

The ugly threat of foreclosure lurks in the minds of many homeowners. Sometimes unanticipated financial troubles, like losing a job, high medical bills, divorce or a death in the family can affect a homeowner’s ability to make his or her mortgage payments. Foreclosure occurs when you fall behind in your mortgage payments, thus authorizing your lender to repossess your property.

In some cases, the property is worth less than the total amount owed to the lender. This may complicate things, as it allows your lender to pursue a deficiency judgment, which represents the difference between the sold price of the property and the amount owed to the lender. If this happens, not only will you lose your home, but you will also be forced to fork out additional money to pay the lender. For instance, if your house is worth $200,000 at the time that a foreclosure occurs and you owe $220,000 to your lending company, a deficiency judgment of payment of $20,000 to your lender can totally knock you out.

Worst of all, foreclosures and deficiency judgments will usually have a negative influence on your credit score. A foreclosure stays put on your credit report for about seven to 10 years and will imply to other future lenders that you are a high risk borrower. This will make it more difficult for you to get a mortgage – or any other loan – in the future. (For more insight, read Consumer Credit Report: What’s On It.)

Preventing Foreclosure

The moment you receive foreclosure notice, the first thing to do is to contact your lender’s Loss Mitigation Department and let them know about your monetary problems and situation. If necessary, take along your personal financial statements/documents and explain your insufficient income and rising living expenses.

Get in touch with your local government-approved housing counseling agency. It will provide free information about the list of organizations ready to bail you out when the bank is threatening to foreclose.

That said, some of the best ways to prevent foreclosure start before you even receive your initial notice. It is never too late to start keeping an eye on your extravagant monthly expenses and begin following a tighter budget. The extra savings from a less expensive lifestyle will allow you to create an emergency mortgage fund that you can tap into if you run into problems down the road. Having a minimum savings of six to eight months’ earnings should give you a reasonable amount of slack until you can improve your financial situation. (To learn more, read Build Yourself An Emergency Fund.)

If the need arises, take the help of your local foreclosure service provider or loss mitigation consultant, provided you have made enough inquiries regarding the legitimacy of these organizations.

Beware of Foreclosure Scams

Unfortunately, there are a number fraudulent foreclosure-related companies ready to jump on you and prey on your unfortunate financial circumstances. The looming risk of foreclosure makes you susceptible to these foreclosure predators. These bogus companies may call themselves “foreclosure consultants” or “foreclosure specialists”. Before opting for any of these companies, make sure you take a close look at their credentials and business reputations by checking them out at sources such as the U.S. Department of Housing and Urban Development.

How do these foreclosure scam-artists find you? It’s rather simple. When your lender files your foreclosure notice with the public trustee, your community is alerted about it through the foreclosure listing in your local newspaper. Soon, phone calls, mail and people from these companies start hounding you.

There are many methods used by these fake companies to swindle homeowners. Let’s go through the tricks that you need to be aware of in case of a foreclosure:

1 Equity Skimming

In this scenario, a person who calls himself a buyer stops at your door and convinces you to sell your property to him (usually for less than market value) and promises to pay off your mortgage. The buyer is likely to advise you to transfer the deed of the property to him, move out of the house and stop interacting with your mortgage lender. The buyer will then rent out your property to a third party and start collecting monthly rental payments. Unfortunately, the buyer will make no effort to pay the mortgage payments, thereby allowing the lender to foreclose on your property. The skimming aspect comes into effect if you have a reasonable amount of equity in your property; the scammer will flip the property to pay off the debt and then make a profit by keeping the equity. Remember: signing a deed over to a third party does not relieve you from your mortgage obligations.

2 Equity Stripping

In an equity-stripping scam, an unscrupulous mortgage lender will come to you with an offer to get you a loan; this person is usually aware of your poor financial condition. The lender pushes you to exaggerate your income on the application form to get the loan approved. You accept the loan because you need the money, even though you aren’t entirely sure that you can afford the monthly payments. The moment you default on your mortgage payments, the lender will rush in to foreclose your property and strip you of your home’s hard-earned equity.

3 Phony Counseling Agencies

You may find a large number of phony counseling agencies that offer their services – for an outrageous fee. But all they do is make some inexpensive phone calls and complete paperwork. These agencies may negotiate a repayment plan with your lender or organize a pre-foreclosure house sale on your behalf. However, the jobs these companies perform can all be easily performed by the homeowner without the additional cost. The main aim of these agencies is to mislead and stop you from getting real help. So take care that you confirm that an agency is genuine before using its services and never undertake to pay up front for foreclosure services.

4 Lender Scams

When you are on the brink of foreclosure, a lender may claim to rescue you from this situation by refinancing your loan with lower mortgage payments. In the beginning, the mortgage payments are considerably low as you are paying the interest only. At the end of the term, you suddenly realize that the total amount you borrowed is still due in a lump sum balloon payment. If you can’t make the entire balloon payment or get your loan refinanced, you may lose your home to the lender.

5 Phony Loan Transaction

In a phony loan transaction, a lender introduces you to a refinancing loan document that claims to bring your neglected loan current. However, the document may have the hidden motive of transferring the title of your home to the company’s name for a very small part of its value. Many times the loan’s terms will include prepayment penalties, balloon or interest-only payments, huge fees and immediate rate adjustments. Therefore, it is prudent to get all legal documents assessed by your attorney before signing them. (For related reading, check out Mortgages: Fixed-Rate Versus Adjustable Rate and ARMed And Dangerous.)

6 Loan Flipping

In this type of scam, your lender may offer to refinance your loan and tempt you with some extra cash. If you fall for the trap and consent to get your loan refinanced, as soon as you make some payments, the lender will persuade you to refinance your loan again and offer you more cash for vacations or home renovations. You accept this attractive offer, take the cash and get your previous loan refinanced. In reality, this extra cash may be much less than the additional fees and costs your lender is charging for refinancing your loan. In this scam, your lender may not even make any attempt to explain to you that the increase in the loans imply added fees and points for refinancing, higher interest rates or even prepayment penalties on each time you take a loan. In short, repetitive refinancing could put you deep in debt and may ultimately lead to the foreclosure of your home. (To learn more, read Digging Out Of Personal Debt.)

7 Internet and Phone Scams

Some con lenders convince you to apply for a low interest mortgage loan on the phone or internet. They then extract vital information about your social security and bank account numbers. In this scam, the loan is immediately accepted, after which you start faxing the documents and sending wire transfer payments to the phony company without even meeting the lender. Unfortunately, this scam will put you in twice as much trouble – your personal details have been stolen or sold and your home is still at risk of foreclosure. (To learn more about avoiding this scenario, see Identity Theft: How To Avoid It and Identity Theft: What To Do If It Happens.)

The Bottom Line

Foreclosure is a grave issue and, if not taken care of immediately, can leave you evicted from your home with a damaged credit score. The best way to save your home is to learn everything about foreclosure and track down appropriate mortgage help companies that will help you out of this jam. The instant you stop giving proper attention to this predicament, fake foreclosure companies will start exploiting you unfairly. Other than your family, your home is your biggest asset and, certainly, you are not going to let a few missed mortgage loan payments, some phony company or even your even mortgage lender to take it away from you without a fight.

Avoiding Foreclosure Scams
by Pooja Dave
Read more: http://www.investopedia.com/articles/pf/07/foreclosure_scam.asp#ixzz1mzzY5X13