PALM BEACH COUNTY, Fla. – Aug. 6, 2007 – Joe Raineri, a radio talk show host in Palm Beach County, got mad one day about property taxes and decided to do something about it. So did part-time Broward County residents Bill Levison and James Guglielmo, as well as others including Dory Kilburn and Frank MacNeil.
Furious at the tax rates agreed to by their elected officials, dozens of people from Broward and Palm Beach counties have organized grassroots groups and are demanding deeper tax cuts on houses and apartments than what state legislators have provided for.
Raineri set up a Web site, formed a citizens group (Not Good Enough Florida), and is devoting one-hour Sunday commentaries on radio station WJNO in West Palm Beach to the subject of property taxes and how he thinks the Legislature blew it.
“Those politicians got it all wrong,” says Raineri, 34. “That’s why so many of us are getting organized. That’s why we’re still in a ruckus. It’s because what they did, well, it’s just not good enough for Florida.”
With names like “Cut Taxes Now,” “No More Property Taxes,” and “Cut Unfair Taxes and Spending,” anti-tax groups and their leaders played a part in prodding Gov. Charlie Crist and the Legislature into making property taxes a priority this year. Now, a second wave of associations like the one Raineri formed is out to oppose what the Legislature passed in June, and to demand additional or different tax reductions.
Most of these activists share a dislike for super-sized homestead exemptions approved by the Legislature, which Florida voters will have the opportunity to accept or reject in a referendum next Jan. 29. Those exemptions contain no tax savings for snowbirds and other nonpermanent residents, and ultimately doom existing Save Our Homes protections for homeowners.
“People need to turn the state upside down on taxes,” said Bernie Navarro, a Miami mortgage broker who formed one of the anti-tax groups, Citizens for Property Tax Reform. “People feel helpless now. There should be protests in the streets.”
Many of the citizen groups have only a few hundred members. Some are linked to established state and national anti-tax organizations, or snowbird associations. Others are well-connected machines with extensive fundraising operations, such as Navarro’s group, which began as a cheerleading venture for an abortive tax plan written by House Speaker Marco Rubio, R-West Miami.
Some analysts say what’s going on is an anti-establishment form of political activism that’s borrowed a page or two from the tactics of California anti-tax crusader Howard Jarvis, who energized residents of the Golden State in the ‘70s with his rallying cry: “I’m mad as hell.”
As for what the groups bring to Florida’s ongoing debate over taxes, one thing is clear: They are keeping the issue at the forefront and are reminding elected officials that their political futures may depend upon a drop in tax bills.
John Hallman, a consultant in Boca Raton who has helped organize some of the groups, fears they may not be marching in step.
“I was hoping for a more unified approach,” Hallman said. “My fear is that if we have too many stray efforts ... people will be confused.”
Some of the associations are championing ballot initiatives that could be put to the state’s voters in November 2008. One proposal, the “30-40-50 plan” would work this way if enacted: a homesteaded taxpayer 62 or older would pay taxes based on 30 percent of a property’s taxable value. Non-senior homesteaders would pay on 40 percent, and everyone else, including snowbirds, landlords and business owners, would pay on 50 percent.
Levison, 71, a retired electrical engineer, summers in Massachusetts and winters in Hallandale Beach. He spends most days e-mailing other snowbirds to rally opposition to Florida’s property tax system. “I have a feeling our best hope is through a lawsuit,” said Levison, who organized Broward Activists for Tax Equity.
Guglielmo, another snowbird, lives part-time in Hallandale Beach and is president of Americans Reforming Florida’s Biased Homestead Tax Law. He, too, wants to take the tax-relief battle to court, and so does MacNeil of Palm Beach Shores, who heads the Committee for Fair Florida Real Estate Taxes.
Kilburn, with the Boynton Intracoastal Group that includes her neighbors in Boynton Beach, says she pays 38 times more in taxes than some of her neighbors. The state’s real-estate tax system, she says, unfairly favors long-time, permanent residents over part-timers, noncitizens and renters.
“This was supposed to be my ideal retirement,” said Kilburn, 56, who lives the rest of the year near Ottawa in Canada. “The tax system is pitting neighbor against neighbor.”
Copyright © 2007 South Florida Sun-Sentinel, Mark Hollis. Distributed by McClatchy-Tribune Information Services.
Sunday, August 12, 2007
Fractional Ownerships:
Fractional Ownerships: Have your vacation home and afford it, too
NORTH PALM BEACH, Fla. – Aug. 9, 2007 – If the cost were the same, which would you rather own: a vacation home in the hills of Tuscany or holiday digs in London, Aspen, South Beach and Rio de Janeiro?
If you prefer the latter, you’re not alone. A growing number of Americans are following the lead of well-heeled Europeans and investing in fractional ownership of vacation property. For the price of that Tuscan villa, you might own quarter shares in the four other destinations.
“That’s exploding,” says Andy Sirkin, attorney and partner in Sirkin Paul Associates of San Francisco and Paris, which specializes in fractional ownership. “Every week, we see a 10 to 20 percent increase in the number of calls.”
As a fractional owner, you actually become a co-owner of a vacation property; you split the purchase price, maintenance and taxes with your co-owners, as well as the property’s appreciation down the road.
The advantages of fractional ownership are numerous:
• Investment diversification. You don’t have to bear the full financial burden of a holiday house you will likely only use a few weeks a year.
• Buying power. You may be able to buy a far more desirable property or in a better location than you could have afforded alone.
• Location. With a do-it-yourself fractional, you’re not tied to properties on the tourist strip, and may opt instead to buy in a more desirable – and affordable – neighborhood.
• Culture cushion. Split the obstacles of setting up house in a foreign country among the group – or better yet, buy into an already established fractional in your country of choice.
• No rental headaches. Although some groups do allow its owners to rent out their allotted time, others prohibit it, as do certain locales.
• Equity participation in the property’s likely appreciation.
• Control over the ownership, maintenance, even the decor.
• Travel diversification. Flexibility to co-own homes in several locations rather than being tied to one.
• Business expense. Want to reward your employees, woo your clients and write off part of your fractional? You may be able to if you use it for business.
The disadvantages are few but can be significant. Though their number is growing with demand, there are still relatively few lenders willing to finance the purchase of a fractional. All kinds of financial foibles can arise if you fail to carve the terms of your fractional in stone with the help of an attorney familiar with the nuances of this emerging field. The pro rata shares may add up to more than what the property would have cost a single buyer. Be as careful in selecting a vacation fractional as you would your own home, since there is no guarantee it will hold its value, even in a resort location.
Baby boomers lead the way
Sirkin says fractionals reflect the changing lifestyles of baby boomers who want to either recoup some of the outlay on their little-used vacation home or diversify their vacation destinations without having to sell the place or, worse, rent it.
“This way, they have use of the house when they want it, the house is not beaten up by being rented out, and they’re not bearing the entire cost of acquiring or maintaining the house. Plus, they don’t have the management headaches of renting it out. That is what is causing people to turn to this in increasing numbers.”
Ownership and control
If this all sounds a little familiar, it should. In fact, perhaps the biggest hurdle facing the emerging fractional industry is that it is frequently confused with your parent’s version: the timeshare.
Two things separate the fractional from the timeshare: ownership and control. With a timeshare, you typically bought the use of a property for two or three weeks a year; there was no ownership in the property itself and you had little, if any, control over when or where you stayed. With a fractional, you are actually a co-owner of the property, either by deed or, as is often the case with foreign fractionals, as a shareholder in a nonprofit business entity such as a partnership or limited liability company. Although deeded ownership does not guarantee you any particular level of control per se, it does provide the opportunity to incorporate that into your governing documents.
As your parents may attest, the problem with timeshares is that their investment value tended to decline rather than appreciate, especially when the developer moved on.
“What gave older timeshare concepts a bad name was that people didn’t really have any control at all, so what happened was, either the property became run down over time or costs went up exorbitantly, or both,” says Sirkin. “So it got to the point where you were paying more than you would for a much nicer hotel room down the street. They were too big, the developers had no incentive to keep it up once they sold out the project and there was no one to actually take care of it.”
Neil McAllister, co-founder of YourFraction.net, a fractional advisory service based in Florida and Edinburgh, Scotland, says fractionals have learned from the mistakes of timeshares.
“I think with the average timeshare, something like 50 percent of it goes to commissions and fees, whereas the true brick-and-mortar value is really quite low,” he says. “The finance people we’re using have said they would prefer that the total of all the fractions does not exceed 130 percent of the value of the property.”
Fractionals are all the rage just now, with megadevelopers such as Ritz-Carlton, Four Seasons, Marriott and Interwest busily marketing private residence clubs, or PRCs, in their luxury resort properties, hoping their four-star pedigrees will lure boomers away from do-it-yourself options.
Would you rather be a direct owner in a small fractional or a luxury PRC member? Sirkin says the choice once again comes down to equity and control. “If you buy a nice house in a desirable resort area, that is going to hold its value, period. Even if the group doesn’t do such a good job of being a group, the basic real estate value is there,” he says.
The fractional solution
There is little doubt that America is on a tear for vacation real estate. According to the National Association of Realtors’ most recent “Vacation Home Buyers Survey,” vacation-home sales rose 4.7 percent to a record 1.07 million in 2006, up from 1.02 million the previous year. Vacation homes accounted for 14 percent of all homes purchased last year, up from 12 percent in 2005. Four out of five owners surveyed said they purchased the home primarily for vacation use.
But Christine Karpinski, author of “How to Rent Vacation Properties by Owner,” says those dream getaways often come with some unrealistic expectations.
“Very few people buy a vacation home with the intention of renting it out; they always think they will be able to use it, but people just aren’t realistic,” she says.
Karpinski is now affiliated with HomeAway.com, which lists some 85,000 paid rental listings for homeowners looking to recoup some of their vacation home investments. HomeAway charges between $140 and $400 for a one-year rental listing, depending on features. She finds fractionals a more realistic alternative to vacation-home ownership – if you think ahead.
“It’s a great way to build equity,” she says. “A lot of times people don’t get into partnerships because they have this idealistic view of the future; they want to retire to Florida or Hawaii. But a lot of times, those decisions are made between the ages of 45 and 55, when you don’t necessarily know your future. Ten years later, you may have aging parents and new grandchildren to where you don’t really want to move to Hawaii.”
How to draft the agreement
Hammering out the details of a fractional falls somewhere between drafting a partnership agreement and writing up governing documents for a condo association. Sirkin estimates the average cost at $2,000 to $4,000, with an additional $400 to run it by a real estate attorney in the county or country where the property is located – definitely a good idea. But remember, those costs are shared by your co-owners.
Most of the fractions Sirkin has worked with number four to eight co-owners; the number is often driven by the desirable number of weeks each year and the proximity of the property. Among domestic destinations, Colorado ranks first, followed by Florida, Hawaii, California, Nevada, Texas and the Carolinas. A quick online search for “fractionals + (your desired location)” will put you in touch with local Realtors, developers and others in the know.
McAllister, who is currently working on fractioning a 55-apartment Tuscan villa and a golf estate at St. Andrews, says fractionals allow even average Joes to have their vacation home and afford it, too.
“If you buy at a sensible price, there is a very good chance that it will appreciate in value, whereas timeshares do nothing but depreciate. And whichever way you look at it, either as an investment or free holidays for X number of years, there’s very little risk.”
NORTH PALM BEACH, Fla. – Aug. 9, 2007 – If the cost were the same, which would you rather own: a vacation home in the hills of Tuscany or holiday digs in London, Aspen, South Beach and Rio de Janeiro?
If you prefer the latter, you’re not alone. A growing number of Americans are following the lead of well-heeled Europeans and investing in fractional ownership of vacation property. For the price of that Tuscan villa, you might own quarter shares in the four other destinations.
“That’s exploding,” says Andy Sirkin, attorney and partner in Sirkin Paul Associates of San Francisco and Paris, which specializes in fractional ownership. “Every week, we see a 10 to 20 percent increase in the number of calls.”
As a fractional owner, you actually become a co-owner of a vacation property; you split the purchase price, maintenance and taxes with your co-owners, as well as the property’s appreciation down the road.
The advantages of fractional ownership are numerous:
• Investment diversification. You don’t have to bear the full financial burden of a holiday house you will likely only use a few weeks a year.
• Buying power. You may be able to buy a far more desirable property or in a better location than you could have afforded alone.
• Location. With a do-it-yourself fractional, you’re not tied to properties on the tourist strip, and may opt instead to buy in a more desirable – and affordable – neighborhood.
• Culture cushion. Split the obstacles of setting up house in a foreign country among the group – or better yet, buy into an already established fractional in your country of choice.
• No rental headaches. Although some groups do allow its owners to rent out their allotted time, others prohibit it, as do certain locales.
• Equity participation in the property’s likely appreciation.
• Control over the ownership, maintenance, even the decor.
• Travel diversification. Flexibility to co-own homes in several locations rather than being tied to one.
• Business expense. Want to reward your employees, woo your clients and write off part of your fractional? You may be able to if you use it for business.
The disadvantages are few but can be significant. Though their number is growing with demand, there are still relatively few lenders willing to finance the purchase of a fractional. All kinds of financial foibles can arise if you fail to carve the terms of your fractional in stone with the help of an attorney familiar with the nuances of this emerging field. The pro rata shares may add up to more than what the property would have cost a single buyer. Be as careful in selecting a vacation fractional as you would your own home, since there is no guarantee it will hold its value, even in a resort location.
Baby boomers lead the way
Sirkin says fractionals reflect the changing lifestyles of baby boomers who want to either recoup some of the outlay on their little-used vacation home or diversify their vacation destinations without having to sell the place or, worse, rent it.
“This way, they have use of the house when they want it, the house is not beaten up by being rented out, and they’re not bearing the entire cost of acquiring or maintaining the house. Plus, they don’t have the management headaches of renting it out. That is what is causing people to turn to this in increasing numbers.”
Ownership and control
If this all sounds a little familiar, it should. In fact, perhaps the biggest hurdle facing the emerging fractional industry is that it is frequently confused with your parent’s version: the timeshare.
Two things separate the fractional from the timeshare: ownership and control. With a timeshare, you typically bought the use of a property for two or three weeks a year; there was no ownership in the property itself and you had little, if any, control over when or where you stayed. With a fractional, you are actually a co-owner of the property, either by deed or, as is often the case with foreign fractionals, as a shareholder in a nonprofit business entity such as a partnership or limited liability company. Although deeded ownership does not guarantee you any particular level of control per se, it does provide the opportunity to incorporate that into your governing documents.
As your parents may attest, the problem with timeshares is that their investment value tended to decline rather than appreciate, especially when the developer moved on.
“What gave older timeshare concepts a bad name was that people didn’t really have any control at all, so what happened was, either the property became run down over time or costs went up exorbitantly, or both,” says Sirkin. “So it got to the point where you were paying more than you would for a much nicer hotel room down the street. They were too big, the developers had no incentive to keep it up once they sold out the project and there was no one to actually take care of it.”
Neil McAllister, co-founder of YourFraction.net, a fractional advisory service based in Florida and Edinburgh, Scotland, says fractionals have learned from the mistakes of timeshares.
“I think with the average timeshare, something like 50 percent of it goes to commissions and fees, whereas the true brick-and-mortar value is really quite low,” he says. “The finance people we’re using have said they would prefer that the total of all the fractions does not exceed 130 percent of the value of the property.”
Fractionals are all the rage just now, with megadevelopers such as Ritz-Carlton, Four Seasons, Marriott and Interwest busily marketing private residence clubs, or PRCs, in their luxury resort properties, hoping their four-star pedigrees will lure boomers away from do-it-yourself options.
Would you rather be a direct owner in a small fractional or a luxury PRC member? Sirkin says the choice once again comes down to equity and control. “If you buy a nice house in a desirable resort area, that is going to hold its value, period. Even if the group doesn’t do such a good job of being a group, the basic real estate value is there,” he says.
The fractional solution
There is little doubt that America is on a tear for vacation real estate. According to the National Association of Realtors’ most recent “Vacation Home Buyers Survey,” vacation-home sales rose 4.7 percent to a record 1.07 million in 2006, up from 1.02 million the previous year. Vacation homes accounted for 14 percent of all homes purchased last year, up from 12 percent in 2005. Four out of five owners surveyed said they purchased the home primarily for vacation use.
But Christine Karpinski, author of “How to Rent Vacation Properties by Owner,” says those dream getaways often come with some unrealistic expectations.
“Very few people buy a vacation home with the intention of renting it out; they always think they will be able to use it, but people just aren’t realistic,” she says.
Karpinski is now affiliated with HomeAway.com, which lists some 85,000 paid rental listings for homeowners looking to recoup some of their vacation home investments. HomeAway charges between $140 and $400 for a one-year rental listing, depending on features. She finds fractionals a more realistic alternative to vacation-home ownership – if you think ahead.
“It’s a great way to build equity,” she says. “A lot of times people don’t get into partnerships because they have this idealistic view of the future; they want to retire to Florida or Hawaii. But a lot of times, those decisions are made between the ages of 45 and 55, when you don’t necessarily know your future. Ten years later, you may have aging parents and new grandchildren to where you don’t really want to move to Hawaii.”
How to draft the agreement
Hammering out the details of a fractional falls somewhere between drafting a partnership agreement and writing up governing documents for a condo association. Sirkin estimates the average cost at $2,000 to $4,000, with an additional $400 to run it by a real estate attorney in the county or country where the property is located – definitely a good idea. But remember, those costs are shared by your co-owners.
Most of the fractions Sirkin has worked with number four to eight co-owners; the number is often driven by the desirable number of weeks each year and the proximity of the property. Among domestic destinations, Colorado ranks first, followed by Florida, Hawaii, California, Nevada, Texas and the Carolinas. A quick online search for “fractionals + (your desired location)” will put you in touch with local Realtors, developers and others in the know.
McAllister, who is currently working on fractioning a 55-apartment Tuscan villa and a golf estate at St. Andrews, says fractionals allow even average Joes to have their vacation home and afford it, too.
“If you buy at a sensible price, there is a very good chance that it will appreciate in value, whereas timeshares do nothing but depreciate. And whichever way you look at it, either as an investment or free holidays for X number of years, there’s very little risk.”
Fixed mortgage rates sink further
This week, mortgage industry experts surveyed by Bankrate.com are almost evenly split when it comes to the direction of mortgage rates. A slight plurality of 38 percent believes that rates will fall over the next 35 to 45 days. Another 31 percent think mortgage rates will rise, and 31 percent predict that they will remain relatively unchanged.
WASHINGTON (AP) – Aug. 10, 2007 – Rates on 30-year mortgages sank this week to their lowest point in two months, a dose of good news for people thinking about buying a home.
Freddie Mac, the mortgage company, reported Thursday that 30-year, fixed-rate mortgages averaged 6.59 percent. That was down from 6.68 percent last week and was the lowest since early June, when rates stood at 6.53 percent.
The moderation is a piece of welcome news for prospective homebuyers, some of whom also have been faced with a situation of harder-to-get credit. In mid-June, rates on 30-year mortgages had climbed to 6.74 percent, an 11-month high.
Mortgages rates have ebbed as recent stock market turbulence has prompted investors to plow money into bonds, driving down rates on bonds. That, in turn, has pushed down rates on mortgages, which have eased amid signs the economy is growing gradually and hiring has cooled off a bit. The unemployment rate inched up to 4.6 percent in July, a six month high.
Rates on 15-year fixed-rate mortgages, a popular choice for refinancing, also moved lower this week. They dropped to 6.25 percent, from 6.32 percent last week. Rates on one-year adjustable-rate mortgages also fell to 5.65 percent, compared with 5.69 percent last week.
However, rates on five-year adjustable-rate mortgages rose this week to 6.33 percent, from last week's average of 6.29 percent.
The mortgage rates do not include add-on fees known as points. Thirty-year and 15-year mortgages each carried a nationwide average fee of 0.4 point. Five-year and one-year ARMs each carried an average fee of 0.5 point.
A year ago, rates on 30-year mortgages stood at 6.55 percent, 15-year mortgages were at 6.20 percent, five-year adjustable-rate mortgages also averaged 6.21 percent and one-year ARMs were at 5.69 percent.
After a five-year boom, the housing market fell into a slump last year. Sales turned weak as did home prices. The slump is expected to drag on probably through the rest of this year.
Worries that the housing slump will worsen and that credit problems in the home mortgage market will spread, possibly hurting the broader financial system and the overall economy, have fed turmoil on Wall Street. Stocks have been swinging wildly in recent weeks.
Problems first sprouted in the market for higher-risk mortgages, which are held by people with tarnished credit histories. But some problems have spilled over to more creditworthy borrowers.
Home foreclosures, meanwhile, have climbed to record highs.
As a result, lenders have been tightening credit standards, making it harder for some people to find financing for big-ticket purchases, such as homes and cars.
The National Association of Realtors on Wednesday lowered its forecast for sales of existing homes – a big chunk of the housing market. It predicted sales would total 6.04 million this year, which would be the lowest level since 2002. A previous forecast had projected sales of 6.11 million for this year.
On the Net: Freddie Mac: http://www.freddiemac.com
WASHINGTON (AP) – Aug. 10, 2007 – Rates on 30-year mortgages sank this week to their lowest point in two months, a dose of good news for people thinking about buying a home.
Freddie Mac, the mortgage company, reported Thursday that 30-year, fixed-rate mortgages averaged 6.59 percent. That was down from 6.68 percent last week and was the lowest since early June, when rates stood at 6.53 percent.
The moderation is a piece of welcome news for prospective homebuyers, some of whom also have been faced with a situation of harder-to-get credit. In mid-June, rates on 30-year mortgages had climbed to 6.74 percent, an 11-month high.
Mortgages rates have ebbed as recent stock market turbulence has prompted investors to plow money into bonds, driving down rates on bonds. That, in turn, has pushed down rates on mortgages, which have eased amid signs the economy is growing gradually and hiring has cooled off a bit. The unemployment rate inched up to 4.6 percent in July, a six month high.
Rates on 15-year fixed-rate mortgages, a popular choice for refinancing, also moved lower this week. They dropped to 6.25 percent, from 6.32 percent last week. Rates on one-year adjustable-rate mortgages also fell to 5.65 percent, compared with 5.69 percent last week.
However, rates on five-year adjustable-rate mortgages rose this week to 6.33 percent, from last week's average of 6.29 percent.
The mortgage rates do not include add-on fees known as points. Thirty-year and 15-year mortgages each carried a nationwide average fee of 0.4 point. Five-year and one-year ARMs each carried an average fee of 0.5 point.
A year ago, rates on 30-year mortgages stood at 6.55 percent, 15-year mortgages were at 6.20 percent, five-year adjustable-rate mortgages also averaged 6.21 percent and one-year ARMs were at 5.69 percent.
After a five-year boom, the housing market fell into a slump last year. Sales turned weak as did home prices. The slump is expected to drag on probably through the rest of this year.
Worries that the housing slump will worsen and that credit problems in the home mortgage market will spread, possibly hurting the broader financial system and the overall economy, have fed turmoil on Wall Street. Stocks have been swinging wildly in recent weeks.
Problems first sprouted in the market for higher-risk mortgages, which are held by people with tarnished credit histories. But some problems have spilled over to more creditworthy borrowers.
Home foreclosures, meanwhile, have climbed to record highs.
As a result, lenders have been tightening credit standards, making it harder for some people to find financing for big-ticket purchases, such as homes and cars.
The National Association of Realtors on Wednesday lowered its forecast for sales of existing homes – a big chunk of the housing market. It predicted sales would total 6.04 million this year, which would be the lowest level since 2002. A previous forecast had projected sales of 6.11 million for this year.
On the Net: Freddie Mac: http://www.freddiemac.com
Subprime Mortgages
PHILADELPHIA – Aug. 9, 2007 – Given all the financial turmoil blamed on subprime mortgages this year, it’s easy to forget that they are a small slice of the mortgage market.
For starters, about a third of the nation’s 75 million homeowners have no mortgage.
Of the $9.8 trillion in outstanding residential mortgage debt at the end of March, 13 percent – or $1.27 trillion – was in the hands of subprime borrowers.
And of subprime borrowers, 13.3 percent were behind on their payments, according to the Mortgage Bankers Association.
If losses reach $113 billion this year and next, as Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pa., predicted, that would still be just 1 percent of the overall mortgage market.
Even so, “it’s big enough to be a catalyst for investors to reevaluate the risks they’ve been taking,” Zandi said. “The financial impact is bigger because investors overstepped so far in so many markets.”
Investor appetite for risk enabled subprime and Alt-A – or minimally documented – mortgage lending exploded from $215 billion in 2001 to $1 trillion in 2005, according to Inside Mortgage Finance. That happened in a symbiotic relationship with soaring house prices, particularly in California, Florida, Nevada and Arizona.
“They are absolutely linked. Without subprime, there is no bubble,” said Susan Wachter, a professor of real estate at the Wharton School of the University of Pennsylvania.
And now, it is going to take a long time to recover.
Zandi predicted that average house prices nationwide will fall 10 percent from their peak in late 2005 to their trough in the middle of next year.
It will take years to unwind the financial knot of mortgages wrapped into debt securities that are now buried deep inside hedge funds and foreign-investment vehicles.
On Wall Street, companies connected to risky mortgage lending have already lost billions in stock market value, as nervous institutional lenders pull back from the sector.
The market value of Radian Group Inc. has evaporated by $2.52 billion – or more than half – since the end of June because of a credit squeeze at a subprime-mortgage investor that the Philadelphia mortgage insurer co-owns.
Another Philadelphia company, RAIT Financial Trust, has lost more than 70 percent – or $1.25 billion – of its market value over the same period because of its exposure to mortgage companies and homebuilders.
Subprime lending did not start out as a monster that laid waste to the equity of homeowners and the market value of lenders.
It has been around for a long time in the form of equity-based lending – which means that loans are based on the value of property rather than the quality of a borrower’s credit – said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Md.
“Historically, the feeling was you couldn’t use a credit score with a subprime borrower because they had no credit,” Cecala said.
But using their experience with credit cards, lenders adapted the use of the credit score to subprime-mortgage lending. That gave them the confidence to put a price on the higher risk of subprime lending.
That contributed to an increase in the U.S. homeownership rate, from about 64 percent in 1995 – where it had been since the late 1960s – to a peak of 69.2 percent at the end of 2004, said Wachter, the Wharton professor.
In 2004, subprime-mortgage lending exploded from 8 percent of the mortgage market – where it had been for years – to 18 percent, Cecala said. It climbed to 20 percent in 2005.
“What happened is that mortgage lenders started digging a lot deeper” for potential borrowers to make loans that could be sold on Wall Street, Cecala said.
The game is over for now.
“We’ve entered a period of uncertainty,” said Gordon B. Fowler, chief investment officer at Glenmede Trust Co., of Philadelphia. “How bad does it get for the consumer and how much will that take down growth? And the other piece of uncertainty is who is going to be left holding the bag? We’re not going to know who is holding the bag for quite some time.”
For starters, about a third of the nation’s 75 million homeowners have no mortgage.
Of the $9.8 trillion in outstanding residential mortgage debt at the end of March, 13 percent – or $1.27 trillion – was in the hands of subprime borrowers.
And of subprime borrowers, 13.3 percent were behind on their payments, according to the Mortgage Bankers Association.
If losses reach $113 billion this year and next, as Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pa., predicted, that would still be just 1 percent of the overall mortgage market.
Even so, “it’s big enough to be a catalyst for investors to reevaluate the risks they’ve been taking,” Zandi said. “The financial impact is bigger because investors overstepped so far in so many markets.”
Investor appetite for risk enabled subprime and Alt-A – or minimally documented – mortgage lending exploded from $215 billion in 2001 to $1 trillion in 2005, according to Inside Mortgage Finance. That happened in a symbiotic relationship with soaring house prices, particularly in California, Florida, Nevada and Arizona.
“They are absolutely linked. Without subprime, there is no bubble,” said Susan Wachter, a professor of real estate at the Wharton School of the University of Pennsylvania.
And now, it is going to take a long time to recover.
Zandi predicted that average house prices nationwide will fall 10 percent from their peak in late 2005 to their trough in the middle of next year.
It will take years to unwind the financial knot of mortgages wrapped into debt securities that are now buried deep inside hedge funds and foreign-investment vehicles.
On Wall Street, companies connected to risky mortgage lending have already lost billions in stock market value, as nervous institutional lenders pull back from the sector.
The market value of Radian Group Inc. has evaporated by $2.52 billion – or more than half – since the end of June because of a credit squeeze at a subprime-mortgage investor that the Philadelphia mortgage insurer co-owns.
Another Philadelphia company, RAIT Financial Trust, has lost more than 70 percent – or $1.25 billion – of its market value over the same period because of its exposure to mortgage companies and homebuilders.
Subprime lending did not start out as a monster that laid waste to the equity of homeowners and the market value of lenders.
It has been around for a long time in the form of equity-based lending – which means that loans are based on the value of property rather than the quality of a borrower’s credit – said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Md.
“Historically, the feeling was you couldn’t use a credit score with a subprime borrower because they had no credit,” Cecala said.
But using their experience with credit cards, lenders adapted the use of the credit score to subprime-mortgage lending. That gave them the confidence to put a price on the higher risk of subprime lending.
That contributed to an increase in the U.S. homeownership rate, from about 64 percent in 1995 – where it had been since the late 1960s – to a peak of 69.2 percent at the end of 2004, said Wachter, the Wharton professor.
In 2004, subprime-mortgage lending exploded from 8 percent of the mortgage market – where it had been for years – to 18 percent, Cecala said. It climbed to 20 percent in 2005.
“What happened is that mortgage lenders started digging a lot deeper” for potential borrowers to make loans that could be sold on Wall Street, Cecala said.
The game is over for now.
“We’ve entered a period of uncertainty,” said Gordon B. Fowler, chief investment officer at Glenmede Trust Co., of Philadelphia. “How bad does it get for the consumer and how much will that take down growth? And the other piece of uncertainty is who is going to be left holding the bag? We’re not going to know who is holding the bag for quite some time.”
University of Florida Survey - House Values
GAINESVILLE, Fla. – Aug. 9, 2007 – Floridians are optimistic about housing prices despite the gloom pervading much of the real estate industry, a new University of Florida survey finds.
Only 5 percent of 287 Florida homeowners said they think their house values will fall during the next five years, according to the survey, which was conducted in July by UF’s Bureau of Economic and Business Research.
Eighty-two percent expected the value of their houses to rise, and 13 percent said they would remain the same. The median respondent expected a gain of 18 percent, or a little more than 3 percent a year.
UF economists said they were not surprised by the results.
“The last time housing prices fell and didn’t recover within five years was during the Great Depression,” said Jonathan Hamilton, a UF economics professor and chairman of the economics department. “Most of the problem in Florida right now is that we’ve had a huge amount of building and lots of speculative buying, and things are now catching up.”
Although there is a large inventory of condominiums for sale statewide, many of these units are likely to be sold and occupied within the next few years, he said.
Florida’s draw as a retirement destination as the baby boomers age is another factor that bodes well for the state, said David Denslow, a UF economics professor who led the research. “As these baby boomers flood into Florida, they will be pushing housing prices up,” he said.
The questions were asked as part of the bureau’s monthly consumer confidence telephone survey. The responses about housing price expectations did not vary significantly by age, race, gender, region within the state or current house value, Denslow said.
“This surprised me a little bit because we expect people to be more pessimistic where there is a huge glut on the market such as the Tampa Bay or the Orlando area,” he said. “The people who do distressed house sales, the Web sites where they say they’ll buy your house for only 80 percent of its value, they love Orlando right now.”
The housing market is in a period of correction after the dramatic appreciation in real estate values nationally and particularly in Florida since 2000, Denslow said. In most Florida markets the median price of existing homes is declining, he said.
“Although these declines are temporary, there will be at least some Florida markets where house price appreciation will be very low over the next five years,” he said. “My guess would be that you’ll see low house price appreciation in the Tampa Bay, Orlando and Miami area simply because of the number of existing units on the market.”
In contrast, large price reductions are unlikely in Gainesville or Tallahassee where the housing boom has not been nearly as dramatic, Denslow said. “And similarly, I don’t think that Jacksonville is going to be hurt as badly as Fort Myers or Naples or the Fort Pierce area,” he said.
The survey’s error rate was 4 percent.
© 2007 FLORIDA ASSOCIATION OF REALTORS®
Only 5 percent of 287 Florida homeowners said they think their house values will fall during the next five years, according to the survey, which was conducted in July by UF’s Bureau of Economic and Business Research.
Eighty-two percent expected the value of their houses to rise, and 13 percent said they would remain the same. The median respondent expected a gain of 18 percent, or a little more than 3 percent a year.
UF economists said they were not surprised by the results.
“The last time housing prices fell and didn’t recover within five years was during the Great Depression,” said Jonathan Hamilton, a UF economics professor and chairman of the economics department. “Most of the problem in Florida right now is that we’ve had a huge amount of building and lots of speculative buying, and things are now catching up.”
Although there is a large inventory of condominiums for sale statewide, many of these units are likely to be sold and occupied within the next few years, he said.
Florida’s draw as a retirement destination as the baby boomers age is another factor that bodes well for the state, said David Denslow, a UF economics professor who led the research. “As these baby boomers flood into Florida, they will be pushing housing prices up,” he said.
The questions were asked as part of the bureau’s monthly consumer confidence telephone survey. The responses about housing price expectations did not vary significantly by age, race, gender, region within the state or current house value, Denslow said.
“This surprised me a little bit because we expect people to be more pessimistic where there is a huge glut on the market such as the Tampa Bay or the Orlando area,” he said. “The people who do distressed house sales, the Web sites where they say they’ll buy your house for only 80 percent of its value, they love Orlando right now.”
The housing market is in a period of correction after the dramatic appreciation in real estate values nationally and particularly in Florida since 2000, Denslow said. In most Florida markets the median price of existing homes is declining, he said.
“Although these declines are temporary, there will be at least some Florida markets where house price appreciation will be very low over the next five years,” he said. “My guess would be that you’ll see low house price appreciation in the Tampa Bay, Orlando and Miami area simply because of the number of existing units on the market.”
In contrast, large price reductions are unlikely in Gainesville or Tallahassee where the housing boom has not been nearly as dramatic, Denslow said. “And similarly, I don’t think that Jacksonville is going to be hurt as badly as Fort Myers or Naples or the Fort Pierce area,” he said.
The survey’s error rate was 4 percent.
© 2007 FLORIDA ASSOCIATION OF REALTORS®
Sales to hold in modest range, says NAR
WASHINGTON – Aug. 9, 2007 – The housing market will probably hold close to present levels in the months ahead, according to the latest forecast by the National Association of Realtors® (NAR).
Lawrence Yun, NAR senior economist, says he isn’t looking for any notable changes in sales activity. “Existing-home sales should be relatively stable over the next few months, holding in a modest range, with some pent-up demand growing from buyers who’ve been on the sidelines,” he says. “Mortgage disruptions will hold back sales over the short term, but long-term fundamentals are favorable. A modest upturn is projected for existing-home sales toward the end of the year, with broader improvement to include the new-home market by the middle of 2008.”
Existing-home sales are forecast at 6.04 million in 2007 and 6.38 million next year, below the 6.48 million recorded in 2006. New-home sales are expected to total 852,000 this year and 848,000 in 2008, down from 1.05 million in 2006. Housing starts, including multifamily units, are likely to total 1.43 million in 2007 and 1.40 million next year, below the 1.80 million units started in 2006.
“With the population growing, the demand for homes isn’t going away – it’s just being delayed,” Yun says. “More buyers, and cutbacks in new construction, will eventually draw down the inventory levels and support future price appreciation, but general gains will be modest next year. Serious buyers today have a long-term view of housing as an investment – speculators have left the market.”
Existing-home prices should ease by 1.2 percent to a median of $219,300 in 2007 before rising 2.0 percent next year to $223,600. The median new-home price will probably fall 2.3 percent to $240,800 in 2007, and then rise 2.3 percent next year to $246,300.
The 30-year fixed-rate mortgage is forecast to average 6.7 percent in the fourth quarter and then ease to the 6.5 percent range next year.
Growth in the U.S. gross domestic product (GDP) is projected to be 1.9 percent this year, down from a 2.9 percent growth rate in 2006; GDP is expected to grow 2.8 percent next year.
The unemployment rate is estimated to average 4.6 percent this year, unchanged from 2006. Inflation, as measured by the Consumer Price Index, is likely to be 2.7 percent this year, down from 3.2 percent in 2006. Inflation-adjusted disposable personal income should rise 3.1 percent in 2007, the same as last year.
© 2007 FLORIDA ASSOCIATION OF REALTORS
Lawrence Yun, NAR senior economist, says he isn’t looking for any notable changes in sales activity. “Existing-home sales should be relatively stable over the next few months, holding in a modest range, with some pent-up demand growing from buyers who’ve been on the sidelines,” he says. “Mortgage disruptions will hold back sales over the short term, but long-term fundamentals are favorable. A modest upturn is projected for existing-home sales toward the end of the year, with broader improvement to include the new-home market by the middle of 2008.”
Existing-home sales are forecast at 6.04 million in 2007 and 6.38 million next year, below the 6.48 million recorded in 2006. New-home sales are expected to total 852,000 this year and 848,000 in 2008, down from 1.05 million in 2006. Housing starts, including multifamily units, are likely to total 1.43 million in 2007 and 1.40 million next year, below the 1.80 million units started in 2006.
“With the population growing, the demand for homes isn’t going away – it’s just being delayed,” Yun says. “More buyers, and cutbacks in new construction, will eventually draw down the inventory levels and support future price appreciation, but general gains will be modest next year. Serious buyers today have a long-term view of housing as an investment – speculators have left the market.”
Existing-home prices should ease by 1.2 percent to a median of $219,300 in 2007 before rising 2.0 percent next year to $223,600. The median new-home price will probably fall 2.3 percent to $240,800 in 2007, and then rise 2.3 percent next year to $246,300.
The 30-year fixed-rate mortgage is forecast to average 6.7 percent in the fourth quarter and then ease to the 6.5 percent range next year.
Growth in the U.S. gross domestic product (GDP) is projected to be 1.9 percent this year, down from a 2.9 percent growth rate in 2006; GDP is expected to grow 2.8 percent next year.
The unemployment rate is estimated to average 4.6 percent this year, unchanged from 2006. Inflation, as measured by the Consumer Price Index, is likely to be 2.7 percent this year, down from 3.2 percent in 2006. Inflation-adjusted disposable personal income should rise 3.1 percent in 2007, the same as last year.
© 2007 FLORIDA ASSOCIATION OF REALTORS
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