The Fed’s Buying – How About You?

March 22, 2009

Info from this week’s Mortgage Market Guide:

ben_s_bernanke

Last week, the Fed used their regularly scheduled meeting to make a blockbuster announcement.

Over the course of 2009, the Fed will purchase an additional $750 billion of mortgage-backed securities, as well as $300 billion in long-term Treasuries, primarily to help shore up the housing market and keep home loan rates low. On the announcement, bonds exploded higher, leaving bond prices within whiskers of the best levels ever.

How does this really impact home loan rates?

While the Fed’s actions may keep mortgage rates from moving higher, they may not cause them to move dramatically lower. The Fed’s actions create demand for mortgage-backed securities, which should help keep the ceiling on home loan rates from moving much higher in the foreseeable future. That’s good news for homebuyers who are seeing the bargains out there and understand that now is the time to act.

But – and this is very important – what actually happens to mortgage rates depends on which bond coupons the Fed purchases. If they purchase higher rate coupons – as they have done so far this year – their continued purchasing will likely keep a lid on rates, but not necessarily push them significantly lower. Additionally, due to many understaffed lenders and investors currently working at maximum capacity, we could once again see that improvements in pricing may not all be passed through to borrowers.

usamcashAnother factor that could impact whether mortgage rates see significant improvement are concerns of future inflation brought on by all the recent aggressive moves by the Fed. While we know there is little inflation at the present time, chatter about future inflation could have a negative impact on home loan rates, or at least stifle any improvements.

Although the media is already spinning it differently, this is not a time to stay on the fence, hoping and waiting for lower rates. Home loan rates remain within inches of all-time historic lows, but may not necessarily move significantly lower, so waiting could be a risky move.

Also, an update on Mark-to-Market – the accounting rule which has had a devastating impact on the financial markets: The Financial Accounting Standards Board (FASB) agreed that it will propose to allow companies to use more “leeway” in applying the accounting rules they use to value their assets, and planned a final vote for April 2. If this rule change is approved, it could result in better first-quarter financial statements for companies that have been affected by this rule. Stocks have been moving higher lately in the hopes that Mark-to-Market will be fixed, and a resolution could help stocks further improve.

Kim Hannemann, Real Estate Consultant/Realtor®, Samson Realty
Cell: 703-861-9234 • Fax: 703-896-5055 • Email: KimTheAgent@gmail.com

It’s Good To Have A Friend In The Business®
samson-realty-and-bird

If you would like to discuss real estate questions, sell or buy a home in Northern Virginia – including Alexandria, Annandale, Arlington, Burke, Centreville, Chantilly, Clifton, Fairfax, Fairfax Station, Falls Church, Kingstowne, Lorton, McLean, Reston, Springfield, or Vienna – contact Kim today.

4 – 4.5% Listings with First-Class Service — Cash Back to My Buyers!


Tips for First-Time Northern Virginia Buyers

March 20, 2009

pricedownReductions in Northern Virginia home prices, and unprecedented low interest rates for mortgages, have combined to offer tremendous opportunities for renters to become homeowners. The prospect of making the change may be exciting, but also overwhelming.

Here are a few common mistakes to avoid:

hud-logoNot understanding the home buying process. Educate yourself. Find a homebuyer seminar that you can attend, or research online. The U.S. Department of Housing and Urban Development has an entire section devoted to first-time homebuyers, information on mortgage programs, downloadable tools such as a “wish list” and home-shopping checklist, tips on selecting a real estate professional, and so on. Another good source is a solid lender such as Wells Fargo or  Prosperity Mortgage whose websites offer consumers a variety of tools and resources on purchasing a home.

housequestionNot asking questions. There are many intricacies to the home buying process, and even though you can gain a basic knowledge on your own, you will still have questions. Be sure to tell your real estate professional that you are new to the process. Choose an agent (like me!) who is willing to spend time with you and walk you through the entire process. A good agent will expect you to have questions at each step – from house-hunting, to making an offer, to the closing (such as, “What the heck is a closing?”). This is one of the largest financial transactions of your life, so you want to have a clear understanding of what’s going on at all times.

Looking outside your price range. Before beginning your home search, get pre-approved by a mortgage professional – preferably one you know or one recommended by your agent – to get an idea of how much you may be able to borrow. Use this information as a starting point in determining your price range. Then take into consideration other factors that will affect your monthly budget once you are a homeowner, such as property taxes, homeowners insurance, utilities, and maintenance. Don’t go out looking at homes before you have a firm idea of your range.

Buying on impulse. Don’t feel pressured into making an offer on the first home you see. Buyers, especially first-timers, may be impressed by the first two or three homes they view. Look at a good selection, then narrow the prospects to a select few and return for a closer look. When you decide to make an offer, work with your agent to get all of your questions answered first. But don’t wait too long to make an offer. The longer you wait, the greater the chance other prospective buyers may place offers, making it harder for you to negotiate a good deal.

storkNot planning ahead. Think about personal changes you are planning in the next five years. For instance, are you starting a family, and if so, is the home large enough and will it continue to be? If you think you’ll be relocating in a few years, you’ll probably want to pay closer attention to potential appreciation and resale value. If two incomes are needed to qualify for financing or to make your payments, do your plans include the ability to sustain those incomes?

Failure to consider location. Don’t just focus on the house. Examine the community. Does it suit your lifestyle? Is the area safe, well-maintained, close to work, stores and schools? Find out about zoning and whether new construction is planned on vacant land in the immediate area. Also consider the potential market for resale in the future. Your agent can also help with that.

    Above all, remember knowledge is key. No question is silly. Your agent and your mortgage professional are invaluable assets throughout the process, and they want you to succeed. Making smart home buying decisions will make the home-buying process less scary and your first home purchase a rewarding experience.


    February 2009 Northern Virginia Sales Info

    March 15, 2009

    graphFebruary 2009 home sales activity for Fairfax and Arlington counties, the cities of Alexandria, Fairfax and Falls Church and the towns of Vienna, Herndon and Clifton:

    A total of 1,067 homes sold in February 2009, a 10 % increase above February 2008 home sales of 969.

    Active listings decreased by 18 % from last year, with 7,811 active listings in February, compared with 9,497 homes available in February 2008. The average days on market (DOM) for homes in February 2009  to 109 days, compared with 116 days in February 2008.

    The average sales price in February fell by 21 % from February 2008, to $380,077, compared with last February’s average of $479,320. The median sales price of homes sold in Northern Virginia in February was $318,000, which is a decline of 23 % compared with February 2008’s median price of $410,500.

    The February pending home sales data, based on signed contracts, is bucking the national trend – 1,817 contracts are pending compared to February 2008 when 1,526 were pending, an increase of 19 %.

    febstats


    The ‘Mark to Market’ Accounting Rule: What it is and why it is important to you now!

    March 12, 2009

    If you are not an accounting type, you probably cannot imagine why anyone would care.

    Barry Habib of the Mortgage Market Guide put this together a couple of months ago. Congress is discussing the issue this week (you know they are certainly not accounting types) so it will be in the news. Amaze your friends with your knowledgeable explanation.

    The financial crisis we are in today was not caused by mortgages or housing, although they were both catalysts. [Kim – Also see my post about these mortgage issues that are related to the problem.] The real reason was an accounting rule called “Mark to Market” (also known as FASB 157).

    Few people have a strong grasp of this rule, and even those who do have a tough time explaining it on air due to time restrictions. So let’s take a few minutes to break it down, so you can have the inside track on this very important concept and understand why it represents some great opportunities.

    Why does ‘Mark to Market’ exist?

    Let’s go back to the stock market crash, which occurred between 2000 and 2002. With the S&P down 49% and the NASDAQ down 71%, many people lost much of their life savings and they were very angry.

    Companies like Enron and Arthur Andersen were able to find ways to make their books look more attractive, which was reflected in an artificially inflated stock price.

    Both the public and Congress had a call for more transparency in business and hastened the passage of “Mark to Market” accounting.

    This is the notion that all assets should be valued as if they were sold on a daily basis. Under the letter of the law, failure to do this conservatively can now result in jail time.

    So what’s the problem?

    Before we get into what this means for banks, let me make a quick analogy using a scenario that should make perfect sense to you and your clients.

    Let’s imagine that you own a house in a neighborhood where all of the houses are priced at around $300,000. Unfortunately, your neighbor, who owns his home free and clear, falls ill and needs emergency cash quickly. Because he is under duress, he must sell the home for $200,000 in order to get the cash he needs right away, even though the home is worth considerably more.

    mtm11Now would this mean that your home is now worth the same $200,000 that your neighbor sold his for? Of course not, because you are not forced to sell under duress. It just means that your new neighbor got a great deal.

    However, if you were a publicly traded company and had to abide by Mark to Market account rules, you and the rest of your neighbors would now have to say, by law, that your home was worth only $200,000 – not the $300,000 you would get for it if you actually sold. So what’s the big deal? Read on.

    So how does this principle apply to banks?

    Let’s say we decide to start a bank . . . call it XYZ Bank. We raise $2 Million to open our doors. Remember that our capital account is $2 Million. Banks make money by taking in deposits and paying low rates of interest to those depositors (maybe throw in a toaster too). We then take that money and make loans with it at higher rates. We keep the difference.

    mtm2So, we turn the $2 Million worth of deposits into $30 Million worth of loans. This puts our ratio of loans to capital (our Capital Ratio) at 15:1 ($15 Million in Loans to $1 Million in Capital). This level is acceptable, as long as we can shoulder some losses and recover.

    Because we are very conservative here at XYZ Bank, the loans we make require a minimum down payment of 30%, a credit score of 800 or better (that’s nearly an 850 which is perfect), proof of income and assets, a reserve of at least two years of mortgage payments (normal is two months) and income requirements that only allow 10% of monthly income to cover all expenses (normal is 40%).

    We do this and our loans perform perfectly. We make lots of money. Nobody is paying late and our clients are sending us holiday cards. They love us . . . it’s a party. You and I are celebrating as we see our stock price soar.

    But real estate values decline and, even though all of our loans are paying perfectly, we must re-assess the loan portfolio to account for the decline in real estate values, which leaves us with less of an equity cushion. We had a minimum 30% down payment, which means the loans were 70% of the value of our assets – until we account for the decline in the market. Now, our position goes from 70% to 90%. That’s riskier and, therefore, worth less than when our loans had a 70% safety position.

    Our accountants tell us that we must “Mark to Market” or risk jail. They say our value is now reduced by $1 Million. Whoa!

    We must take or write down this loss against our capital account. It is a paper loss – we don’t write a check, we have no late payers, no defaults, no bad business decisions. Still, we must reflect this $1 Million paper loss in our Capital Account, which drops from a $2 Million to $1 Million in value.

    Here’s where things get problematic.

    At this level, with $30 Million in loans outstanding, we now have a capital ratio of 30:1. At this level of leverage, alarms begin to sound.

    Our ratios are out of the safe zone; we could go under with just a few losses, deposits are in jeopardy. Hello FDIC examiner, we are on the watch list, the Securities and Exchange Commission (SEC) is asking questions and our stock starts to tumble. The business networks are showing negative coverage of our now troubled bank. We are in big trouble.

    The problem – we are “over-leveraged”. The solution – we have to “de-lever” . . . and do so quickly. But there are only two ways to do that, and one of them isn’t really an option.

    toilet

    The first way is to raise capital, but that’s not going to happen when our ratios are out of whack and we are in serious trouble as well as on the FDIC watch list. It is unlikely that anyone will be willing to invest cash in XYZ Bank.

    The other option is that we can sell assets, like the outstanding loans, which are increasing our capital ratio. Like your neighbor, who owned his home outright but needed cash for medical bills, we are now under duress. The paper we are holding has a lot of value, but we have to sell it quickly and, because of that, cheaply. So, we offload the loans at a loss, which exacerbates the problem because those losses further reduce our capital account.

    Very quickly, like a flushing toilet, things start to spiral – we are going down.

    The problem multiplies . . . 

    The problem doesn’t stop there. The fire sale we just had on our loans makes things worse – even for the banks that bought them up and thought they were getting a great deal.

    mtm3Under Mark to Market, the loans we just sold must be included in the comparables that other financial institutions use to value their assets. This is how the problem spread and got so bad so fast. Other good institutions, with good loans, have to mark down. Just like us, they become over-leveraged. It’s a chain reaction, all triggered by a well intentioned, but over-reaching accounting rule.

    Financial institutions fold, sell, or freeze. Credit – the life blood of our economy – is cut off at the source. Because of a lack of available credit, home sales and refinances crawl, auto sales drop and jobs are lost. Additionally, the economy enters a recession.

    During the last recession in 2001, the economy recovered relatively quickly thanks to $3 Trillion worth of home equity withdrawals. But, more restrictive programs, a lack of available credit, and lower home values will make it difficult for us to use home equity to help pull us out of a recession this time around.

    Fixing the Problem

    The Federal Reserve has passed a rescue plan, which, over time, will provide some level of help. Some banks will get money to infuse into their capital accounts. Others can sell some assets to the government in an effort to “de-lever”.

    But, the big thing that is not talked about, not well understood, is the part of the rescue plan that traces this financial crisis back to the source.

    The US Congress has given the SEC its blessing to modify “Mark to Market” accounting. [Kim – A growing number of regulators seem to think some relaxation of the rules may make sense. The top U.S. banking supervisor, Comptroller of the Currency John Dugan, told TIME he is in favor of letting the banks mark back up the value of some of their toxic assets. “I think there are some changes that ought to be made,” Dugan says. Mark-to-market accounting is a problem, he says, for illiquid assets because “those things have just stopped trading altogether.” Dugan does not support doing away with mark-to-market entirely; not even industry lobbyists want that. But his deputy will argue at the congressional hearings on Thursday that limited changes affecting the pricing of illiquid toxic assets should be made.

    Others seem to be coming around to the banking industry’s position. On Tuesday, Federal Reserve Chairman Ben Bernanke said he would support changes in pricing illiquid assets. Also this week, investor Warren Buffett said in a CNBC interview that he would favor suspending the mark-to-market rules. Even the Securities and Exchange Commission (SEC), which has long backed these rules, recently asked the Financial Accounting Standards Board (FASB), a private group based in Norwalk, Conn., that sets accounting rules in the U.S., to look into the matter.

    The Financial Accounting Standards Board is working on new guidance to help banks determine whether a market is active or inactive and whether a transaction is distressed. Securities and Exchange Commission Chairman Mary Schapiro told Congress on Wednesday that she was pushing FASB to issue the guidance in the second quarter.]

    It won’t be eliminated, as we will not want to go back to the Enron days. But [the SEC] is likely to adjust the Mark to Market provisions.

    Here’s one potential solution – even rental or commercial real estate properties can be valued two ways:

    1. The comparable sales method, which determines the value based on what other assets have sold for, which is the way Mark to Market works currently.

    2. A cash flow method, which values the property based upon cash coming in.

    If we see Mark to Market modified to use cash flow to value assets, without requiring a large percentage discounting mechanism – wow! What a shot in the arm that would be. We’d likely see the stock market rally, with financial stocks leading the uphill charge.

    Consider that [as of the end of 2008] fund managers are holding 27% of their assets in cash, compared with just 3% they held in cash when the stock market peaked in October of 2007. That means there is a lot of money on the sidelines that can push stock prices higher. Additionally, think about the redemptions from hedge funds that eventually need to be put back to work. A good stock market helps individuals feel better about purchasing homes. Additionally, stronger balance sheets for financial institutions will allow them to lend more money.


    Go TJ – Two Intel Top Tens!

    March 11, 2009

    tjhsstTwo students from Thomas Jefferson High School for Science and Technology (TJHSST) finished in the top ten in the country in the 2009 Intel Science Talent Search. TJHSST is a Fairfax County public school.      

    The fourth place finisher was Narendra Tallapragada of Burke, who received a $25,000 scholarship for his project to find ways to simplify complex models of atomic and molecular interactions. His goal is to one day create minicomputers that could be used, for example, to create automatic insulin pumps that can be placed inside diabetic patients or intelligent clothing that responds to temperature.

    Seventh place went to Alexander Kim of Fairfax, who received a $20,000 scholarship for researching the variation and diversification in populations of the giant American river prawn, the largest freshwater invertebrate in North America. His research furthers understanding of how species evolve and has implications for the future of ecosystems. 

    This year’s Intel Science Talent Search finalists come from 17 states and represent 35 schools. Of the more than 1,600 high school seniors who entered the 2009 Intel Science Talent Search, 300 were announced as semifinalists in January. Of those, 40 were chosen as finalists and invited to Washington, D.C., to compete for the top ten awards. 

    FCPS – News Releases

    Kim Hannemann, Real Estate Consultant/Realtor®, Samson Realty
    Cell: 703-861-9234 • Fax: 703-896-5055 • Email: KimTheAgent@gmail.com

    It’s Good To Have A Friend In The Business®
    samson-realty-and-bird

    If you would like to discuss real estate questions, sell or buy a home in Northern Virginia – including Alexandria, Annandale, Arlington, Burke, Centreville, Chantilly, Clifton, Fairfax, Fairfax Station, Falls Church, Kingstowne, Lorton, McLean, Reston, Springfield, or Vienna – contact Kim today.

    4 – 4.5% Listings with First-Class Service — Cash Back to My Buyers!


    Slow Down/Move Over Law In Virginia

    March 11, 2009

    moveoverslowdownlogo1I just saw a note posted on our local MLS – Realtors drive a lot – about a relatively new law in Virginia that require drivers to yield the right of way or reduce their speed when approaching stationary emergency vehicles on the highway.

    Virginia code § 46.2-921.1. Drivers to yield right-of-way or reduce speed when approaching stationary emergency vehicles on highways; penalties.

    The driver of any motor vehicle, upon approaching a stationary emergency vehicle, as defined in § 46.2-920, that is displaying a flashing, blinking, or alternating emergency light or lights as provided in §§ 46.2-1022, 46.2-1023, and 46.2-1024, shall (i) on a highway having at least four lanes, at least two of which are intended for traffic proceeding as the approaching vehicle, proceed with caution and, if reasonable, with due regard for safety and traffic conditions, yield the right-of-way by making a lane change into a lane not adjacent to that occupied by the stationary emergency vehicle or (ii) if changing lanes would be unreasonable or unsafe, proceed with due caution and maintain a safe speed for highway conditions.

    Violation of any provision of this section shall constitute a Class 1 misdemeanor. If the violation resulted in damage to property of another person, the court may, in addition, order the suspension of the driver’s privilege to operate a motor vehicle for not more than one year. If the violation resulted in injury to another person, the court may, in addition to any other penalty imposed, order the suspension of the driver’s privilege to operate a motor vehicle for not more than two years. If the violation resulted in the death of another person, the court may, in addition to any other penalty imposed, order the suspension of the driver’s privilege to operate a motor vehicle for two years.

    Kim Hannemann, Real Estate Consultant/Realtor®, Samson Realty
    Cell: 703-861-9234 • Fax: 703-896-5055 • Email: KimTheAgent@gmail.com

    It’s Good To Have A Friend In The Business®
    samson-realty-and-bird

    If you would like to discuss real estate questions, sell or buy a home in Northern Virginia – including Alexandria, Annandale, Arlington, Burke, Centreville, Chantilly, Clifton, Fairfax, Fairfax Station, Falls Church, Kingstowne, Lorton, McLean, Reston, Springfield, or Vienna – contact Kim today.

    4 – 4.5% Listings with First-Class Service — Cash Back to My Buyers!


    It’s Big Johnson Basketball Time Again !!

    March 11, 2009

    It’s once again that time . . . bigjohnson

     . . . when people all over the country stop doing what they are doing and feverishly consider their picks for the NCAA Basketball Tournaments so they can enter the SEVENTH Annual Big Johnson COED College Basketball Tournament Classic, sponsored by yours truly. 

    newshuffleStick It To The Man – that’s me! A NEW 4GB Apple iPod Shuffle (in your choice of silver or black ) awaits the winner of EACH of the Men’s and Women’s Big Johnsons! (YOUR gender is irrelevant. I am referring to the separate basketball tournaments.) If you win, and you happen to already have an iPod – or other music player (ptui!) – I’ll give you the equivalent in iTunes credit, if you prefer. I would suggest that you check out the NEW Shuffle carefully before you decide. And as usual, anyone who gets more points than The Man will win something. Last time it was a king-sized Snickers bar. Can’t beat chocolate . . .

    ti82It won’t cost you anything but your sanity . . . and not even that, if you just choose the higher-seeded team in each matchup, and then pick the eventual Final Four winner based on their mascot or school colors. How difficult can this really be? Well, there might be upsets. Or not. And gee, there are only – uh, lessee, 64 teams in each tournament, where’s my TI-82? – okay, 126 total games.

    And it takes a special kind of person to enter BOTH the Men’s and Women’s tournaments. Yes, I mean you!

    The brackets are being set by the NCAA (Men’s Sunday March 15; Women’s Monday March 16). The men’s first round games start on Thursday March 19 (we don’t do the men’s “play-in” game on Tuesday), and the women’s on Saturday March 21 – and the brackets are locked shortly before the first game of each tournament. That doesn’t leave you much time, so GET GOING!

    The Group Name on ESPN is “Big Johnson” for each tournament, and the group password is: kimsentme. That’s right, kim sent me, one word.

    espn_logo

    You can get there through the following URLs:

       Men’s Tournament Challenge:  http://games.espn.go.com/tcmen/frontpage

       Women’s Tournament Challenge:  http://games.espn.go.com/tcwomen/frontpage

    I know some of you like to fake out ESPN with an alias and throwaway email, but please be sure I can identify you from your name or the name of your entry. Otherwise I will keep your iPod, ha ha. 

    After you create your entries, be sure to join the Big Johnson group in each tournament! And, if you create your entry before the brackets are set, be sure to return in time to choose your winners before they lock. Most people will wait until March 17 or 18, but don’t forget! ESPN tracks your points as the tournaments progress. I will weigh in every now and then with a Big Johnson update note.

    FRIENDS ARE WELCOME, so you can forward this if you wish. Just be sure they identify themselves to me!

    Best of luck to everyone!

              Kim

    Kim Hannemann, Real Estate Consultant/Realtor®, Samson Realty
    Cell: 703-861-9234 • Fax: 703-896-5055 • Email: KimTheAgent@gmail.com

    It’s Good To Have A Friend In The Business®
    samson-realty-and-bird

    If you would like to discuss real estate questions, sell or buy a home in Northern Virginia – including Alexandria, Annandale, Arlington, Burke, Centreville, Chantilly, Clifton, Fairfax, Fairfax Station, Falls Church, Kingstowne, Lorton, McLean, Reston, Springfield, or Vienna – contact Kim today.

    4 – 4.5% Listings with First-Class Service — Cash Back to My Buyers!