Sales of New Homes Have Dropped 21 Percent During the Past Year

August was the worst month for sales of new homes in seven years, according to figures released this morning by the government.

The official sales pace for last month was a seasonally adjusted annual rate of 795,000 units – well below the 867,000 economists were betting on and the slowest since June 2000.

downward move more than erased July's uptick in new home sales, and reflects some of the credit issues that roiled the stock market last month.

During the past year, sales of new homes have dropped some 21 percent, which is forcing builders to provide huge incentives to move the houses they've completed.

For August, the government said the median price of a new home sold was $225,700 – 7.5 percent lower than the same period last year. That's the biggest drop in 37 years.

"Certainly problems across the mortgage finance arena are taking their toll on buyer demand, which is weighing heavily on builder confidence measures," said David Seiders, National Association of Home Builders chief economist, in a press release. "We now expect to see home sales return to an upward path by the second quarter of 2008 and we expect housing starts to begin a gradual recovery process by the third quarter of next year. At that point, the market will have substantial growth potential."

Inventories of new homes for sale increased to an 8.2 months supply, indicating that there are likely to be continued price reductions in the coming months as builders try to find ways to close deals.

Taken with the bad news about existing home sales numbers released this week, we have a gloomy picture of the overall market. Existing sales were down an astounding 4.9 percent last month. That's the worst monthly performance since March of this year and scuttles any hope that July's rather tepid results had offered.

Housing starts lowest since '95

Home builders began work on the fewest homes in 12 years in August, raising the risk the real estate woes will spread to other parts of the economy.

The Commerce Department said Wednesday that housing starts slid 2.6 percent, to an annual rate of 1.331 million. Building permits, a sign of future construction, dropped 5.9 percent, to a 1.307 million pace, also the slowest since 1995. Both figures came in below economists' estimates.

The housing slump could deepen after borrowing costs rose and lenders shut off access to credit, causing growth to slow even more, economists said.

On Tuesday, Federal Reserve policymakers lowered their benchmark interest rate by half a percentage point to prevent a broader economic slowdown.

"The housing market deteriorated significantly in August," said Brian Bethune, an economist at Global Insight Inc. in Lexington, Mass. "Housing activity will continue to be a significant drag on overall growth through 2008."

Construction of single-family homes plunged 7.1 percent in August, to a 988,000 rate, the slowest since March 1993.

Work on multifamily homes, such as townhouses and apartment buildings, jumped 13 percent, to an annual rate of 343,000.

The decrease in starts was led by a 38 percent plunge in the Northeast that was the biggest since 1990 and an 18 percent decline in the West. Construction increased 11 percent in the South and 4.2 percent in the Midwest.

The number of homes under construction fell 1.2 percent, to a 1.132 million pace. Housing completions decreased 0.2 percent, to an annual rate of 1.523 million. The number of properties authorized but not yet started skidded 0.9 percent, to 195,300.

Falling real-estate prices and subprime mortgage defaults will probably prolong the home-building recession, already the worst in 16 years.

As mortgages become harder to get, increasing foreclosures will throw more properties back on the market, economists said.

Know when to hire tax adviser & pay off that mortgage early

QUESTION: How do I decide whether I should hire a tax preparer to do my taxes, which are on extension, or do the return on my own?

ANSWER: A good reason to hire a tax adviser/preparer is when you've had a major financial change that greatly affects your tax return/situation. For example, if you leave a job with an employer and start your own business, you'll be confronted with completing a Schedule C.

Before hiring a tax adviser to help you with new tax challenges, I suggest you do some reading. Tax advisers charge by the hour, and good ones don't come cheaply, so it will be costly to utilize them as a "tutorial on taxes."

Q: How can I save money on my large mortgage? Is it smart to pay off my mortgage early, and what are the best ways to do that?

A: Keep an eye out for declining interest rates, such as we've had of late, and watch for opportunities to refinance. The best time to refinance a mortgage is when you can lock in a lower monthly payment to recoup the costs of refinancing within a reasonable period of time (less than five years). Be sure you're going to stay with the property for at least that long.

You may also "save" money by prepaying your debt sooner than is required. You should consider doing so especially if you aren't willing or able to use your extra cash to fund investments that could provide you with a higher rate of return than the interest rate you're being charged on your mortgage.

Simply send in extra payments whenever you have extra money available, or you could just add a certain set amount to each monthly payment.

If you have a low-cost mortgage and access to good investment options, then it's not such a good idea to pay off your mortgage faster than required. For example, if a person, say in her 30s, with extra monthly cash flow has a choice between paying down her 6.5 percent mortgage vs. socking the money away into her employer's tax-deductible retirement savings plan, better to opt for the retirement plan.

Another case where paying down mortgage debt early may not make sense is if it depletes your emergency reserve and causes you to run up high-cost credit-card debt when unexpected expenses arise.

Mortgage Deliquency & Foreclosure Lies

The national press attention related to the national Foreclosure Problem has been highly misleading. For those within the industry, we have always known that the problems are more geographic specific than what was being led on. What newly released data shows is that 7 states have the highest concentration of new and increasing delinquency and foreclosure rates. They are: Ohio, Indiana, Michigan, Florida, California, Arizona and Nevada.

Here is a recent news program on this:

http://video.msn.com/v/us/msnbc.htm?g=828eba81-1eeb-4312-9d35-5b3ad4eaa73c&f=00&fg=copy

Even more interesting, is that 34 states reported a DECREASE in both delinquency and foreclosure rates.

Credit Cruch will Impact Home Sales until 2008

Tighter credit for home mortgages will measurably dampen home sales in the short term and postpone an expected recovery for existing-home sales until 2008, according to the latest forecast by the National Association of Realtors(R).

Lawrence Yun, NAR senior economist, said unusual disruptions in the mortgage market are dampening the outlook for home sales, notably for August and September. "There's been an unusual hit to home sales, starting in March when subprime problems emerged and more recently when problems spread to jumbo loans, with many potential buyers on the sidelines.

"However, the jumbo loan market is now beginning to settle, and FHA-insured loans are helping to fill the subprime vacuum. The volume of existing-home sales this year will be better than 2002, which was the second year of the housing boom."

Existing-home sales are projected at 5.92 million this year and then to rise to 6.27 million in 2008, compared with 6.48 million in 2006. New-home sales should total 801,000 in 2007 and 741,000 next year, below the 1.05 million in 2006.

"A sharp production pullback by homebuilders deep into 2008 is a healthy trend that will help trim down housing inventory," Yun said. Housing starts, including multifamily units, are expected to total 1.37 million this year and 1.26 million in 2008, compared with 1.80 million in 2006.

"The mortgage markets will calm further in the months ahead, but it's important to underscore the fact that conventional loans --the vast majority of available financing -- are available to creditworthy borrowers," Yun said. "Patient buyers in most areas who do their homework will recognize that housing remains a good long-term investment."

Existing-home prices are likely to slip 1.7 percent to a median of $218,200 this year before rising 2.2 percent in 2008 to $223,000. The median new-home price is estimated to drop 2.2 percent to $241,100 in 2007, and then increase 1.7 percent next year to $245,100.

The 30-year fixed-rate mortgage is projected to average 6.4 percent for the balance of the year and then edge up to the 6.5 percent range in 2008.

"We expect the Fed to cut rates two times before the end of the year, which will lower interest rates for prime borrowers and FHA-insured loans," Yun said. "FHA modernization could buffer the fallout of subprime loans, which would raise our sales forecast in the future."

Growth in the U.S. gross domestic product (GDP) is forecast at 2.0 percent in 2007, below the 2.9 percent growth rate last year; GDP will probably grow 2.7 percent in 2008.

The unemployment rate should average 4.6 percent for 2007, unchanged from last year. Inflation, as measured by the Consumer Price Index, is estimated to be 2.8 percent in 2007, compared with 3.2 percent last year. Inflation-adjusted disposable personal income is likely to increase 3.6 percent this year, up from 3.1 percent in 2006.

The National Association of Realtors(R), "The Voice for Real Estate," is America's largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.

Existing-home sales for August will be released September 25; the Pending Home Sales Index is scheduled for October 2 and the next forecast will be October 10.

Foreclosures at a Record High

The number of homeowners receiving foreclosure notices hit a record high in the spring, driven up by problems with subprime mortgages.

The Mortgage Bankers Association reported Thursday that mortgage-holders starting the foreclosure process in the April-June quarter reached 0.65 percent, marking the third consecutive quarter that this figure has set an all-time high.

The delinquency rate, which tracks the number of people who are behind in their payments but have not yet entered the foreclosure process, was also up sharply during the spring, rising to 5.12 percent of all loans, up nearly three-fourths of a percentage point from the same period a year ago.

Doug Duncan, the MBA's chief economist, said the worsening performance was driven by two factors -- heavy job losses in the Midwest states of Ohio, Michigan and Indiana and the collapse of previously booming housing markets in California, Florida, Nevada and Arizona.

The Midwest has been hit hard by a heavy loss of jobs in manufacturing, especially in autos and related industries.

"The percent of mortgages in Ohio that are 90 days or more past due or in foreclosure is still more than twice the national average and 1 percent of all the mortgages in Michigan had foreclosure actions started on them during the last quarter," Duncan said.

He said there were also significant problems in the neighboring states of Indiana, Illinois, Kentucky, Tennessee and Pennsylvania.

Analysts said the problems in the formerly red-hot housing markets of California, Florida, Nevada and Arizona reflected in part speculators walking away from mortgages they can no longer afford.

During a five-year housing boom, the prices in these areas surged, creating what many analysts have described as a speculative bubble as investors bid up the price of homes hoping to quickly resell them for a profit.

Now with home sales falling, the inventory of unsold homes rising and prices stagnant, some speculators are choosing to default on their mortgages.

Another big problem is that an estimated 2 million adjustable rate mortgages are scheduled to reset this year at sharply higher interest rates, which will cause monthly payments in some cases to double or even triple, a problem that is especially severe in the market for subprime mortgages, loans offered to borrowers with weak credit histories.

The delinquency rate for subprime loans increased sharply to 14.82 percent -- up from 13.77 percent -- in the first quarter.

The delinquency rate for prime loans, offered to borrowers with good credit histories, also increased but by a much smaller amount, rising to 2.73 percent, up 2.58 percent in the first quarter.

Democrats have blamed predatory lending practices for a large part of the current problems and have introduced a number of bills aimed at helping homeowners stay in their houses.

Federal and banking regulators issued guidance this week encouraging lending institutions to work with borrowers to restructure loans at more favorable terms rather than foreclosing on the existing mortgages.

Last week, President Bush announced changes in the Federal Home Administration insured-loan program to help combat the expected wave of foreclosures and also answer attacks from Democrats that his administration has been slow to respond to a growing crisis in mortgage foreclosures.

Real Estate Pros singled out for credit restrictions

If you are a RE Pro and need (re-)financing in the near future, GET IT NOW! Wall Street, which initially created the loose credit environment, is now redefining it. More documentation requirements, lower loan to values, higher Ficos, and - you guessed it - higher rates. The definition of "real estate professional" is broad, and can even include any person who owns more than two properties! Below is a listing of who can be considered a "real estate professional":

* Real Estate Brokers and Real Estate Agents, and their employees.
* Property Managers and employees of Property Managers or Property Management Companies.
* Home Improvement Dealers or Contractors and their employees.
* Home Builders and General Contractors and their employees.
* Real Estate Investors (defined as any person who owns more than two properties).
* Mortgage Brokers and their employees.
* Mortgage Lenders' employees, including principals and officers (excludes employees of national banks).
* Title Companies' employees, including principals and managers.
* Real Estate Appraisers and employees of Real Estate Appraisers or Appraisal
* Management Companies.


My recommendation (for anybody) is to consider the following:

* Do refinances required over the next 1-2 years now.
* Create financial reserves and flexibility by getting a Heloc.