Northern Virginia Real Estate Blog

When comparing two investments with equal risk, a rational person will choose the investment with a higher rate of return.

This behavior is called Risk Aversion and is a basic tenet of personal investing.

An off-shoot of Risk Aversion is that a rational person will only invest in an instrument of greater risk if the returns are greater, too.

The chart at right illustrates this concept, comparing return rates on two investments:

• U.S. Government bonds
• Mortgage-backed bonds

The difference in investment return rates is sometimes called a “spread” and the historical spread between government debt and mortgage debt is somewhere near 1.5 percent. 

However, notice how the spread started to grow starting in July 2007.

July 2007 marked the “official” start of the Credit Crunch and as mortgage delinquencies grew nationwide, so did the market’s perceived risk of investing in them. 

By the start of this month, the spread had nearly doubled.

But that all changed Sunday.  When the government announced its takeover of Fannie Mae and Freddie Mac, it put the same “risk-free guarantee” on mortgage debt that has helped keep U.S. government debt so cheap to finance and the spread immediately shrunk.

This is one reason why mortgage rates fell Monday and why they should continue to stay low over the near-term.  With the U.S. government backing the mortgage market, there’s no room for the risk premium that helped keep rates high this past year.

It doesn’t mean more people will qualify for conforming home loans, but for the ones that do, financing should be cheaper.

A home inspection is a complete, top-to-bottom, visual check-up of the structure and systems of a house. 

It is meant to be an objective determination of a home’s condition.

A home inspection usually takes 3-6 hours to complete, depending on the size of the home. 

During the inspection process, the inspector will examine all of the following components of a home:

• Home exterior including doors, decks, and vegetation
• Heating and cooling systems for leaks and efficiency
• Electrical systems for safety and soundness of design
• Plumbing systems for venting, distribution, and drainage

In addition, the inspector will review the roofing system, the home’s interior, and several other parts of the property.

A home inspection may be ordered by a home owner or by a home buyer.

For a home owner, an inspection can detail a home’s shortcomings and provide a roadmap for repairs.  This can help a person prepare his home for sale because “major issues” can be addressed in advance of listing.

For a home buyer, a home inspection physically reviews a home under contract, identifying structural flaws that may impact the home’s desirability.  This is essential for the negotiation process because no home is “perfect” – even new ones!  

A home inspection highlights potential long-term trouble spots and the likelihood for expensive home repairs.  This is why real estate professionals often recommend inspecting a home immediately after signing a purchase contract.

To find a qualified home inspector in your area, ask your real estate agent for a referral, or visit the American Society of Home Inspectors Web site.

Source
American Society of Home Inspectors
Frequently Asked Questions on Home Inspections
http://www.homeinspector.org

(Image courtesy: Anderson Home Inspections)

According to the June 2008 Case-Shiller Home Price Index, home prices in 15 of the 20 largest U.S. real estate markets either improved, or showed growth from the month prior.

This is the fourth straight month in which that happened which means that a national housing recovery may already be underway.

Now, it’s worth stating that all real estate is local and that there’s no such thing as a “national real estate market”, but for home buyers looking to to maximize their negotiation power to get the best possible “deal”, spotting trends like this before the media does is a good thing.

So far, only Bloomberg and a few others have chosen to highlight the positives from the otherwise-negative Case-Shiller report.  By contrast, most publishers are focusing on annual home price figures which show a hefty drop of 15.9 percent.

We shouldn’t dismiss annual trends because they’re helpful in the theoretical sense, but for real, live home buyers trying to identify trends and market bottoms, it’s the month-to-month data that matters most.

After looking at 4 consecutive months of Case-Shiller data, the month-to-month data appears to show that home prices have stabilized in most major markets.  And, in some, they’ve already started to recover from their lows.

Source
U.S. House-Price Slide Eases, S&P/Case-Shiller Shows
Courtney Schlisserman
Bloomberg.com, August 26, 2008

When a homeowner buys a new home, he has 3 options of what to do with his current residence:

1. Sell the home, paying off the mortgage in full
2. Keep the home as a second/vacation home
3. Convert the home to an investment property

The most common action plan is the first one — sell the home and pay off the mortgage.  However, with home prices poised to rebound, some savvy homeowners are trying to avoid “selling low”.

Unfortunately — as of August 1, 2008 — waiting out the market won’t be so easy.

Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.

Among the highlights of Fannie Mae’s changes:

Selling the primary residence
If the new home being purchased closes prior to the existing home’s sale, both payments must be used to qualify the buyer for the new mortgage.

Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.

Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.

If it seems like mortgage rules are getting strict, that’s because they are.  And they’re expected to get tougher, too.  With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the “fringe” borrower from access to mortgage money.

Mortgage rates may rise through 2009, or they may fall.  We don’t know.  But what we do know is that borrowing money to buy a home will be tougher.

If you plan to buy a home in the next 12 months, consider moving up your timeframe or — at least — planning ahead.  Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.

As compact fluorescent bulbs gain favor across the country, it’s important to remember that they contain mercury and mercury is harmful to humans.

Because even though CFLs contain small amounts of mercury — less than 4 milligrams per bulb — it’s still enough mercury to cause brain damage.

If you’re interested, this 4-minute video from the University of Calgary shows how mercury damages neurons in the brain.

But don’t let the presence of mercury stop you from using CFLs — they are much more positive than negative if you exercise good care.

The Environment Protection Agency provides some basic handling tips:

1. CFLs are made from glass.  Therefore, screw and unscrew the bulb using the base and not the bulb.
2. Never force a CFL into a light socket.
3. When the bulb burns out, take it to a specially-designated recycling center in your area.  Do not throw out a CFL with the “normal” trash.

In addition, the EPA drafted guidelines for dealing with broken bulbs within a household.  Among the recommendations: Don’t wash your mercury-covered clothing, and don’t vacuum up the poison.  This is somewhat counter-intuitive for most people.

The EPA’s review of CFL safety is 3 pages long and can be viewed on its Web site.

CFLs are more expensive than traditional bulbs but offer long-term savings in both energy and environment costs.  And, with common sense care, CFLs pose no household health risks.

Private Mortgage Insurance (PMI) is an insurance policy paid to a lender in the event that a homeowner defaults on his home loan. 

With the growing number of mortgage defaults nationwide, mortgage insurers are finding their balance sheets under attack and their revenues in the red.

So far this year, mortgage insurers have paid out $6 billion in claims.

In response to the losses, the mortgage insurance industry is using two tactics to return to profitability — and both mean bad news for homeowners.

1. Raise the minimum standards to get insurance
2. Raise the annual mortgage insurance cost

This is very similar to what Fannie Mae and Freddie Mac are doing to shore up their respective balance sheets; lending to only the most credit worthy, and making sure to charge them for their commensurate risk.

Because of the higher PMI rates, it’s getting more expensive for small-downpayment home buyers to finance their homes.  And that’s if they can even still get mortgage insurance. 

Some mortgage insurers now require a 10 percent minimum downpayment in certain states.

So with the number of mortgage defaults expected to rise through 2009, qualifying for PMI should get more expensive and more difficult.  If you plan to make a small downpayment on your next home — or plan to remortgage your current low equity home — consider moving up your timeframe.

It may not be as cheap or as easy to get financing as it is today.

(Image courtesy: The Wall Street Journal)

Average Sales Price, Average Days on Market and Total Active Listings

Click below for more detailed charts …

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Average Sales Price, Average Days on Market and Total Active Listings

Click below for more detailed charts …

Continue Reading »

Average Sales Price, Average Days on Market and Total Active Listings

Click below for more detailed charts …

Continue Reading »

Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.

Effective today, the rule book just got a little bit tougher.

According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.

The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.

Second Home Guideline Changes

• Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI (what is PITI anyway?) reserves for both properties in their bank accounts.
• With 30 percent equity, the PITI reserve can be reduced to 2 months.

Previously, there was no minimum reserve requirement.

Investment Property Guideline Changes

• With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant’s monthly household income.
• Without 30 percent equity, rental income may not be applied to the applicant’s monthly household income and 6 months PITI is required for both properties.

Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.

Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.

This is because more restrictive guidlines lead to two separate, but concurrent, outcomes:

1. The demand for homes reduces because fewer buyers qualify for mortgages
2. The supply of homes increases because fewer sellers can refinance into more affordable home loan

Less demand and more supply places downward pressure on home prices.

Now, remember that mortgage guidelines continuously evolve and what’s accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you’re reading about mortgages online with your loan officer before making any real estate-related decisions.