Morgan Stanley wrote off about $3.7 billion in subprime loans and Citigroup about $5 billion, leaving many analysts feeling that the worst of the crisis is over. The future of subprime paper consists of finding a fair market value for the loans that are recoverable and separating out the unrecoverable junk. Once the paper has been classified and bundled, the market forces artificially driving real estate down will diminish.

With the falling dollar, US real estate is a golden investment for international capital and money is already flowing into hard assets in the commercial market. With the continuing dollar weakness, oil price inflation and US economic growth leading the Western World, US real estate markets will recover quickly.

Some are predicting that mortgage lenders tightening the standards will lead to a further drop in home sales in 2008, while contrarians see a positive side to reducing the predatory practices of the past. Housing bulls say that increasing credit availablity to debt-healthy consumers at even better rates will prevent a catastrophic downturn in the economy. 

But, the good news is that if you are looking to buy a home now, you are presented with huge cost saving opportunities that in effect allow you to turn back the clock on the bubble. Because bubbles come and go, the most recent one is gone, but another will come along and people who purchased during the current downturn will have realized significant asset appreciation in that time.

Washington-based Campbell Communication’s survey of 1,744 mortgage brokers was conducted August 23-31, and is one of the earliest “quantitative measures of the major disruptions in the mortgage originations market which started in early August,” says the survey.

Not surprisingly, the survey found that home purchase closings were most often canceled for homebuyers with subprime credit. Fifty-six percent of subprime homebuyers in August had canceled closings compared to 21 percent of homebuyers seeking prime conforming mortgages who had canceled closings, a startling high number. In 2004, in another survey of real estate agents taken by Campbell Communications back in 2004, respondents indicated that only 4 percent of home purchase closings failed to close for mortgage-related reasons.

What a difference interest rates and investors’ appetite for risk can make.

Thomas Popik, a designer of the survey, noted that the reasons for canceled closings were different depending on credit class and product category. Prime conforming homebuyers were more likely to withdraw from the transaction while subprime homebuyers were more likely to have problems getting mortgage approval, he said.

“The survey found that both prime and subprime homeowners are having trouble refinancing adjustable rate mortgages,” Popik said. “Sixty-four percent of subprime homeowners could not refinance while 50 percent of homeowners seeking prime conforming mortgages could not refinance. Subprime homeowners most commonly had issues with subprime loan programs no longer being offered and FICO scores. Those seeking prime conforming mortgages most commonly found appraised property values and loan-to-value (LTV) ratios as impediments.”

Other product categories covered in the survey were Alt A loans and prime jumbo loans. Alt A loans have lower documentation requirements for borrowers’ income and assets.

Jumbo loans have a loan amount greater than the Fannie Mae and Freddie Mac conforming limit of $417,000.

The bottom line is that loan-to-value ratios have returned to more traditional limits. For prime jumbo loans, the maximum acceptable LTV has tightened to 90 percent, the lowest of any of the four product categories surveyed. For prime jumbo loans, the minimum acceptable FICO score now averages 679, the highest of the four product categories surveyed.

Subsequently, the survey found substantially reduced mortgage broker production in the month of August 2007 as compared to August 2006. Production of prime conforming loans was down approximately 20 percent while production of Alt A loans was down nearly 50 percent.

One of the major reasons is that lenders are failing to meet their commitments to fund loans that they had previously fully approved. Twenty percent of commitments to fund subprime loans through mortgage brokers were not met during the month of August. Survey respondents indicated that one-third of their most frequently used subprime lenders in August are no longer accepting applications or funding loans. For prime jumbo lenders, approximately 15 percent are no longer accepting applications or funding loans.

The subprime problem has changed the way mortgage brokers operate. They typically submit identical applications for the same borrower to multiple lenders for the following reasons: rate shopping, uncertainty regarding mortgage approval, uncertainty regarding prevailing underwriting guidelines, and concern that lenders will not honor funding commitments. While mortgage brokers more often submit multiple applications for subprime and Alt A borrowers, this practice has become more prevalent for prime credit applicants as well. On average, mortgage brokers are currently submitting 1.7 applications for prime conforming loans; another Campbell Communications survey of mortgage brokers in 2006 found only 1.2 applications submitted on average for prime conforming loans.

“There is very little hard data available about what is currently going on in the mortgage originations and home sales markets,” Popik noted. “The Mortgage Bankers Association weekly application index is likely being skewed by mortgage brokers submitting multiple applications. The National Association of Realtors Pending Home Sales Index does not account for sales that will fall through because of mortgage issues. Our survey shows that the number of home purchase transactions falling through due to the mortgage market disruption was substantial for the month of August. Mortgage originations statistics for the month of August from government registries of deed and industry surveys will not become available for another 60-90 days. To the best of my knowledge, we have the most current and actionable data available on the wholesale mortgage market and on homebuyers served by mortgage brokers.”

Editor’s note: For information about obtaining the new survey report, contact John Campbell at (202) 363-2069, email john@campbellsurveys.com. The full survey instrument is available for viewing online at www.campbellsurveys.com/chgmkt07.

Reports from the twelve Federal Reserve Banks indicated that economic activity continued to expand in June and early July. New York, Richmond, St. Louis, Minneapolis, and San Francisco described the pace of growth as “moderate” while Cleveland and Chicago saw it as “modest.” Philadelphia noted that economic conditions improved. Kansas City said the regional economy continued to grow but at a moderating pace, and Dallas characterized its economy as strong but said it decelerated. Boston and Atlanta described business contacts’ reports as “varied” or “mixed.”

On balance, consumer spending rose at a modest pace, although a number of Districts indicated that sales were mixed or below expectations. Several reports indicated that capital spending increased, and expenditures for most business services continued to rise. Employment increased further in most regions and in many sectors of the economy. Most Districts said that residential construction and real estate activity continued to decline. Commercial construction and real estate markets were generally more active than during the previous reporting period. District reports indicated that manufacturing activity continued to expand during June and early July. Household lending declined in most regions, while commercial and industrial lending expanded at a modest pace. Contacts generally reported ongoing input cost pressures, particularly for petroleum-related inputs, while prices at the retail level continued to increase at a moderate rate. Energy and natural resource activity remained at high levels, or in some instances, rose further. Many Districts described overall wage gains as moderate and/or similar to the previous reporting period. Agricultural conditions varied widely, as the impacts of drought were felt east of the Mississippi River and heavy rains affected the Dallas and Kansas City Districts.
Construction and Real Estate
Most Districts said that residential construction and real estate activity continued to decline on balance. Many Districts, however, noted increased activity in some individual market locales or segments. Atlanta, Chicago, St. Louis, and Minneapolis said construction decreased. Boston and Kansas City said housing markets remained “soft” and “weak,” respectively, while San Francisco indicated that residential markets were weak and had slowed further in some areas. New York said markets were mixed but stable. Two notable exceptions were the Cleveland and Richmond regions, which experienced slight increases in sales. Atlanta said home inventories remained high, as did Dallas (even after a slight decline in the recent period). Inventories increased in Kansas City, but they declined in New York, and contacts in Boston and Cleveland described the number of homes for sale as “normal” and “acceptable,” respectively. District reports on home price appreciation were mixed: Boston noted a return to price appreciation and Kansas City indicated slower rates of decline. But Richmond and Chicago reported slower rates of increase or the beginning of declines, and in the Dallas District, some contacts projected a correction in entry-level home prices. Looking ahead, contacts in the Cleveland District were uncertain about how long it would be until the market turned, and analysts in Dallas had revised their housing outlook down. Contacts in Atlanta expected further declines overall, though they anticipated the market in Florida would be flat.

Commercial construction and real estate markets were generally more active than during the previous reporting period. New York said markets strengthened and San Francisco reported continued firming. Cleveland, Atlanta, Minneapolis, and Kansas City indicated small gains in development. Richmond and Dallas described local markets as still “solid” and “robust,” respectively. Chicago said the pace of development was steady, and St. Louis said markets were mixed. Richmond and Chicago observed that overall commercial vacancy rates were stable. Office vacancy rates fell in four regions. Demand for industrial space increased in four Districts, while net absorption in the Minneapolis District was negative. Richmond, Kansas City, and San Francisco reported increases in rental rates for commercial space, and New York said that the asking rents for space “continued to soar.”

A home’s four C’s

When I became a real estate agent, I discovered something about home buyers: A lot of them cry. Right in front of you. After a few times I began to understand. This is a high-pressure, extremely emotional decision. No house will ever fully live up to your dreams, and whatever compromises you make (and you’ll have to make some) you’ll be stuck with for years.

I’ve never met anyone who was totally rational about evaluating a home, but the way to get closest, I’ve found, is to break the process into discrete parts. Just as diamond buyers focus on four competing criteria (carats, clarity, color and cut), home buyers need to consider a home’s four Cs: cost, condition, capacity and convenience.

The worksheets on the following pages have helped my clients weigh those factors and make the inevitable tradeoffs with fewer tears; they should work for you too.
A home’s true cost

I see a lot of buyers make a basic mistake: When deciding if a particular house fits their budget, they look only at listed price and their probable mortgage payments.

But to make an honest comparison of the houses on your list, you must consider all the costs you’ll be facing. In addition to mortgage payments, there are maintenance costs, property taxes and homeowners association fees, utilities and insurance.

Your total outlay should be no more than a third of your gross income (ideally, less).

Define ‘acceptable’ condition

Unless you’re buying brand new, expect your home to need some upgrades. Just be sure the issues aren’t structural (such as those under “red light” below, which your home inspector can help you identify). Fixing these could run as much as $30,000, says New Jersey builder Jay Cipriani.

Better to go with a home needing cosmetic work (”green light”) or at least a less extensive overhaul (”yellow light”). The investment you make in resolving these will improve your quality of life while living there and increase the resale value.

Consider capacity

To squeeze into a budget, you might have to get a smaller - wait, I’m a real estate agent: cozier - house than you’d like. So forget about square footage, often a misleading number. More important is how that space is allocated. These questions will help you evaluate whether the space in a house fits you.

Does it have enough closet space? Rather than look at the number of closets, measure the length of them (for instance, six feet in the hall, two in the kids’ rooms and so on). Compare the total with that of your current home. Also, take along a hanger to make sure the closets really are deep enough for clothes.

Are there enough bedrooms? One of the most awkward moments for a real estate agent is when the husband counts the bedrooms and says “We’ll all fit,” then the wife gets a gleam in her eye. Ideally, you’ll know your family’s expansion plans before shopping. Since that’s not always possible, consider whether there’s room for surprise long-term guests, be they kids or in-laws. If you can’t afford extra bedrooms, is there an area that could be converted, like an attic or a basement?

Does the kitchen suit my needs? Think about whether there’s space for you, your family and your guests - as well as your cooking gear. (I’ve seen kitchens with cabinets too shallow for a microwave.) Don’t forget about the fridge, which can be costly to replace: A family of four needs at least 22 cubic feet.

Is there a spot to work from home? Is there room for a desk, a computer and files? Even if you don’t need an office, your next buyer might: A work space can add an average of $12,000 to resale value, according to a study done by Remodeling magazine.

Weigh the price of convenience

Cities offer great job and cultural opportunities, but they generally come with high real estate costs. To get more house for your money, you might look along the edge of a hot neighborhood or in a smaller town nearby.

But will you miss the pace? Will you end up with a longer, pricier commute than you’d prefer? Will family and friends ever visit?

To determine whether moving farther out is worth the sacrifice, look at a house in the area you like and a similar one 15 to 30 minutes away. Then consider the factors in the worksheet below.

by Alison Rogers
Thursday, August 16, 2007provided by CNNMoney

Alison Rogers is the author of “Diary of a Real Estate Rookie.”

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