North Bay Real Estate Blog

Foreclosures Hurt Your Health, Study Says

Daily Real Estate News  |  May 4, 2011  |  

Big Jump Expected in New U.S. Households
Millions of young adults are beginning to move out of their parents’ homes and create new households at the fastest rate since 2007. Some housing experts are predicting these young adults may provide a major jump to U.S. housing starts--possibly by more than 50 percent, even by next year--and increase housing consumption at a rate nearly double that of the past two years, Bloomberg News reports.

In 2011, between 750,000 and 1 million new households are expected to be created, says UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport. In the year ended March 2010, new households stood at 357,000--the lowest on record, according to U.S. Census data. The “depressed rate” in new household formation has continued to jeopardize the housing market’s recovery, experts say.

But as the employment picture continues to improve, more young adults are leaving Mom and Dad’s house and making a new home for themselves. The “moving-back-in-with-Mom-and-Dad phenomenon” had caused a backlog of pent-up households, Charles Lieberman, chief investment officer with Advisors Capital Management LLC in Hasbrouck Heights, N.J., told Bloomberg News. “Improved economic conditions” will “enable these households to split up and resume living in their own residences.”

Housing starts are expected to get a boost to about 648,000 this year and near 900,000 in 2012 (it stood at 586,800 last year), says Brad Hunter, chief economist and national director of consulting for Metrostudy. The increase in housing starts, he says, reflects a “shadow demand” for new homes among family members who have moved in together because of economic conditions.

“The demographic component of housing demand is strong," he says. "It’s just the economic and psychological components that are holding things back.”

Source: “New Households Form at Fastest Rate Since ’07 in Resurgent U.S.,” Bloomberg News (May 1, 2011)

Did you know that effective January 1, 2011, there was a new law passed requiring most homes to have carbon Monoxide detectors installed by July 1, 2011? Well there was, and it effects not just landlords, but HOME OWNERS too!

It is called the Carbon Monoxide Poisoning Prevention Act of 2010: SB 183. It requires a carbon monoxide detector device to be installed in any existing dwelling "intended for human occupancy" that has a fossil fuel burning heater or appliance, fireplace, or attached garage. These devices must be installed in existing single-family dwelling units on or before July 1, 2011, and in all other dwellings on or before January 1, 2013.

For general information regarding carbon monoxide, go to www.epa.gov/iaq/co.html

In a Legal Q&A inside a recent CA Assoc. of Realtors Magazine, the following question was asked and answered:

Q - I'm a landlord, and I heard that I now need to give an IRS Form 1099 to my plumber who works on my rental properties. Is that true?

A - Yes, if you pay your plumber $600 or more over the year for the work on your rental properties. Under one provision of a new federal law, Section 2101(h) of H.R. 5297 (Small Business Jobs and Credit Act of 2010) that went into effect Jan. 1, 2011, any person who receives rental income must provide an IRS Form 1099 for all aggregate annual payments of $600 or more made to a service provider such as a plumber, carpenter, gardener, or handyman. This new law applies to both residential and commercial property. In previous years, only real estate licensees doing property management were required to file the 1099, not property owners. Congress has extended this requirement to "a person receiving rental income from real estate."

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Forbes.com

Money
No Double-Dip For Housing
Brian S. Wesbury and Robert Stein 04.06.10, 12:01 AM ET

With evidence of a self-sustaining economic recovery now hard to deny, many pundits are finding new reasons to be bearish. The most recent is that the Federal Reserve has officially ended its massive ($1.25 trillion) mortgage purchasing program. This, some say, will lead to another downturn in housing, which could drag the economy down all over again.

Although the end of the Fed's purchases will certainly not help the housing market, we do not believe it will result in a "double-dip" for housing or the economy. Instead, we expect home building, home sales and home prices to all be up a year from now vs. where they are today. Not on every street or in every community, but for the nation as a whole.

First, it's important to recognize that while the Fed has stopped buying mortgage-backed securities, it is not planning on suddenly selling its holdings. Most likely, the Fed will hang onto the vast bulk of them for at least several years and allow the natural process of refinancing and principal repayment to gradually reduce the size of its portfolio.

Second, we do not expect mortgage rates to suddenly spike as the Fed exits the market. The Fed announced the eventual end to its mortgage purchases back in September 2009, when long-term mortgage rates were about 160 basis points above the yield on the 10-year Treasury (roughly the 20-year average). But today, even though the Fed has ended its program of purchases, the "spread" between mortgage rates and the 10-year is only 120 basis points. If mortgage lenders are suddenly having extra trouble finding the funds they need to lend, they sure have a funny way of showing it.

Third, watchful observers of the mortgage market know that the total amount of lending necessary to support the housing market in the next year is not particularly large by historical standards. Lower home prices, relatively low levels of sales and the high loan-to-value ratios that prevailed during the bubble years mean that the capital needed to support housing in the next year is not that substantial.

The average price of an existing home sale right now is roughly $220,000. Meanwhile, the typical homeowner now has a mortgage worth 62% of their home's value. So, if a buyer has to make a 20% down-payment (which means the new mortgage equals 80% of the home's value) and the debt that is retired by the previous owner is 62% of value, the demand for mortgage credit goes up by only 18% of $220,000, or approximately $40,000.

So if existing homes sell at a 5.75 million rate in the next 12 months (a 10% increase vs. the previous 12 months), that should require about $230 billion in net new lending. Meanwhile, new home sales should require about another $90 billion. (New homes average $275,000, and we're assuming 20% down and sales equal to 400,000.)

In other words the total new lending needed to support a 10% increase in housing activity over the next 12 months is just $320 billion. Compare this to the $150 billion to $200 billion in principal repayments over the next year and you can see that mortgage lenders do not need a large increase in their loan book to finance a rise in home sales.

Fourth, housing prices have fallen below fair value. Relative to rents, national average home prices are about 10% below fair value and have been the lowest relative to replacement cost in more than 30 years.

Markets are efficient and participants in the housing market are well aware of its problems, so we believe these prices already reflect the "shadow inventory" of foreclosures and short sales in the pipeline. Buyers and sellers are not blind, they don't have to wait to see homes pop up on the MLS to factor them into the price they are willing to bid or ask. That's why in the past three months some of the places with the largest excess inventories have seen the biggest gains in prices, including San Diego, Phoenix and Las Vegas.

Fifth, and perhaps most important, the labor market--the last of the lagging economic indicators--has finally fallen into place as a positive for the economy. Private sector payrolls increased 123,000 in March (198,000 including upward revisions to prior months). Meanwhile, civilian employment, an alternative measure of jobs that includes the self-employed and startup businesses, is up 1.36 million in the past three months, the most for any three-month period since 1994.

Yes, the housing market has taken it on the chin. And, yes, the Fed is finally backing out of the market. But for the five reasons above, we think the battered and bruised housing market is going to be in better shape one year from now than it is today.

Brian S. Wesbury is chief economist and Robert Stein senior economist at First Trust Advisors in Wheaton, Ill. They write a weekly column for Forbes. Brian S. Wesbury is the author of It's Not As Bad As You Think: Why Capitalism Trumps Fear and the Economy Will Thrive.