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This week The Norris Group Real Estate Radio Show and Podcast presents Part 8 of I Survived Real Estate 2009.
There is a proposal being supported by 16 senators to increase the tax credit to $15,000 dollars for next year. The current $8,000 dollar tax credit started at $15,000 dollars, but it was then taken down to $7,500 dollars, and then it was increased to $8,000 dollars. MBA is supporting an open $15,000 dollar tax credit. That includes owner occupied and second homes. Every time someone buys a house, they spend an average of $7,500 dollars. That money goes into places like Home Depot, Lowes, Porter Paint, and furniture companies. MBA’s economist estimates that if the $15,000 dollar tax credit was approved today, then an additional 400,000 purchases would take place over the next year. $7,500 multiplied by 400,000 is a lot of money. David Kittle would argue that when these people begin to buy these homes that they would most likely be buying a foreclosure. The government is going to have to spend money to bail out that market anyway, so David thinks this is a better option.
Christopher Thornberg believes that this proposal is ridiculous, because you cannot expect the government to continuously subsidize everything. However, Christopher does think that there is a reason for governments to provide these opportunities, because the market can get into a death spiral. Temporary credit causes a short term burst in sales to stabilize the market, but then you must stop subsidizing and let the markets fix themselves.
One year ago, Fannie and Freddie were put into conservatorship. They were not too big too fail. If the government had allowed everything to fail, things would have been ten times worse than they are right now, but these problems would be over by now. We need to allow businesses to fail. Independent lenders are going out of business, because they cannot get warehouse line capacity. This is because the Obama administration has put on a capital requirement which forces these lenders to put a dollar into reserve for every dollar they lend. One year ago, we had 120 facilities that gave warehouse lines to lenders, but we now have only 12. As individual mortgage bankers go out of business, all the money is being funneled to Wells Fargo, Chase, BB&T, Bank of America, and Citi.
Bruce asks Joseph Magdziarz who has the final say as to what a property is worth. Is it the appraiser, the review appraiser, the underwriter, or is there a boss of the underwriter. The problem with government subsidies is that we cannot find the real market. When subsidies are affecting the market, we cannot find the true demand and supply balance. An appraiser usually has the opportunity to observe the property. An AVM is just an awful valuation model that may tell you which appraisal should be reviewed based on statistics. Joseph thinks that it is wrong for lenders to use AVMs to turn down an appraiser’s opinion. You should stay with you appraiser’s opinion, or you should get a review appraisal done. Unfortunately, that is not going to happen. We must remember that government intervention only postpones the eventual. We need to have a free market.
Joseph talked to five major builders in his market area. Most of them build 700 to 800 homes per year. One had taken 3 permits out this year, and he told Joseph that he never wants to own lots and subdivisions. He hired The Appraisal Institute to come up with a pricing mechanism, but he wanted a real value, because he did not believe that he could build his properties for what he could sell them. In most companies, the underwriter has the final say in the value of the property. Bruce asks if there is a boss of the underwriter who can trump the underwriter’s decision. The speaker claims that his company does not do this, but this may be true in other companies. One of the problems that Joseph has come across is that many of the underwriters are not certified, yet they are responsible for second guessing someone who is trained in appraisal.
Bruce asks what happened to the buyer’s ability to look at the market and say, “I’ve seen all the vacant houses that are listed for $75,000 and I want to buy this property at $135,000.” The system is trumping the buyer’s decision as if they have no idea what they are doing. Bruce provides an example of how this problem is affecting his company. Bruce bought a property in Moreno Valley for $50 grand and he fixed with $35 grand. When he attempted to sell the property, he got six offers within 48 hours for $120 grand to $122 grand. From Bruce’s perspective, that states market value. There were six buyers looking at all the market inventory and they thought Bruce’s property was a better deal than the other property’s priced at $120 grand, and they also thought his property was superior to the properties being sold at $75 grand. The appraisal for Bruce’s property came in at $102,000, and the review appraisal came in at $85,000. Bruce would not have been rewarded for his efforts if he sold the property at $85 grand, so he no longer makes the effort to buy and sell in Moreno Valley. The consequence for this is that there could have been a $120 grand comp for the entire neighborhood to enjoy, but now they have a $50 grand comp to look at, because they did not let the buyer determine what market value is. Bruce chose to keep this property and rent it for $1,150 dollars. The value of owning a house is being topped at half of rental value. Bruce thinks that is ridiculous.
Tommy tells Bruce that this problem would not have occurred if the property had been sold through an auction. Auctions are not contingent on financing. Most of the homes that Tommy sells are financing, but the buyer already knows what they are qualified for. In Tommy’s entire life, he has never had an appraiser dispute a house price that was sold in an auction.
Christopher Thornberg says the problem is that the banks worry about the appraisals, and they are not under the assumption that buyers are concerned about the appraisals. If we allowed a system where we had recourse mortgages again, then we would have deals in which buyers could buy houses above the appraisal value. However, the buyer would have to sign a deal which would allow banks to take the buyers assets if the buyer goes bankrupt. Bruce interrupts Thornberg, exclaiming that what Thornberg is proposing is that the appraisal system is correct. Bruce feels that we must respect the buyer’s decision more than that. Thornberg explains that the bank does not know that Bruce had six offers. They are under the assumption that there is only one accepted offer, and the appraisal came in at less than that offer. The bank is worried that if the buyer cannot pay his mortgage, which is half of rent, then they must turn around and they can only sell that property for $85 grand. If the buyer could sign a secondary note, making the deal a full recourse loan, then it shouldn’t make a difference.
Bruce asks John what the percentage of his sale price to his cost is in this market. The sticks and bricks costs about $50 dollars per square foot, but that does not include the land and the additional fees. In Fontana, John has built homes in the last 5 years that are now repos. John’s company tried to sell to people who were qualified and had good FICA scores. At that time, Wells Fargo was very nervous about the Alt A and subprime loan. John’s competitors would sell to anybody including investors and people who were not occupying the properties.
The federal first time homebuyer tax credit allows you to get the credit regardless of whether or not you paid any taxes. The state program only gives you as much credit as you have already paid in taxes. John must decrease his prices to encourage buyers to buy his homes. His homes are more expensive than foreclosures, so he must show the value difference between his homes and foreclosures.
John says that builders are not building 225,000 homes as Chris mentioned previously. Builders are currently only building about 40,000. John’s company will only build about 70 homes this year.
The video of the live event is not being aired online HERE.
You can visit isurvived2009.com to learn more about our sponsors and speakers.
Here are the speakers involved in the event:
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Bruce Norris President The Norris Group |
David Kittle 2009 Chairman Mortgage Bankers Association |
Pat Vredevoogd Combs 2007 President National Association of Realtors |
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Tommy Williams 2008 President National Auctioneers Association |
Christopher Thornberg Principal Beacon Economics |
John Young Vice President California Builders Industry Association |
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Joseph Magdziarz Vice President Appraisal Institute |
Rick Sharga Senior Vice President RealtyTrac |
To Benefit:
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I Survived Real Estate 2009 Sponsors
A huge thank you to all of our sponsors who made this event possible.
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National Association of Real Estate Investors |  |
Tags: Beacon economics, bruce norris, california building industry association, Christopher Thornberg, david kittle, i survived real estate, joseph magdziarz, legilsation, MBA, mortgage bankers association, mortgage brokers association, national association of realtors, Pat Vredevoogd Combs, real estate, real estate information, RealtyTrac, Rick Sharga, robert rivinius, seminar, stimulation, the national auctioneers association, the norris group, Tommy Williams