NAHB Update
July/August 2009
BUILDER CAUTION REFLECTS FRAGILE HOUSING MARKET IN JUNE
Indicating that single-family home builders remain cautious and concerned about the fragile state of today's economy and housing market, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) declined one point to 15 in June.
"The outlook for home sales has improved somewhat in recent months, due largely to implementation of the first-time home buyer tax credit and gains in housing affordability," says NAHB Chairman Joe Robson. "However, looking forward, homebuilders are facing a few headwinds, including expiration of the tax credit at the end of November, a recent upturn in interest rates and, especially, the continuing lack of credit for housing production loans."
"Builders are taking their cue from consumers, who remain uncertain about the economy and their own situation," says NAHB Chief Economist David Crowe. "Builders are also finding it difficult to complete a sale because customers cannot sell their existing homes."
Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as "good," "fair" or "poor." The survey also asks builders to rate traffic of prospective buyers as "high to very high," "average" or "low to very low." Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good rather than poor.
Two out of three of the HMI's component indexes were unchanged in June, including the index gauging current home sales, which held at 14, and the index gauging traffic of prospective buyers, which held at 13. Meanwhile, the index gauging expectations for the next six months declined a single point, to 26.
Regionally, the decline was entirely focused in the South, which is the nation's largest housing market. There, the HMI declined 3 points to 15, while the rest of the regions posted gains. The Northeast had a one-point gain to 20, the Midwest, a one-point gain to 15, and the West, a two-point gain to 14.
NEW GUIDELINES NEEDED FOR APPRAISING DISTRESSED PROPERTIES
Using foreclosed and distressed sales as comparables with appraisals on single-family homes without adequately reflecting the differences in the condition of the respective properties is needlessly driving down home values, according to NAHB.
"Any home buyer can recognize the difference between a well-kept home and a distressed property that is damaged or not properly maintained," says NAHB President Joe Robson. "So, it only makes sense that an appraiser should be required to consider the overall condition of a property and the specific factors related to a foreclosure or distressed property sale when selecting and adjusting the value of comparables."
Appraisers are often only required to conduct exterior inspections of properties that are being used as comparables because they are normally unable to enter these homes and examine their interiors. Too often, properties that have been subject to foreclosure or distressed sales have issues related to deferred maintenance or internal damage that an external inspection simply cannot reveal.
"While most appraisers do a fine job, there needs to be proper regulatory guidelines for those who use distressed or foreclosed properties as comparables when determining home values," says Robson. "It is essential that appraisers have the proper experience and guidance to accurately assess values in distressed markets."
Robson adds that in neighborhoods where comps include a large number of short sales or foreclosures, appraisers should have the option of expanding the geographic area or extending the timeframe for eligible sales to get a more representative basket of the value of homes sold in the area.
Currently, improper or insufficient adjustments to the comparable values of foreclosed and/or distressed homes often results in the undervaluation of new sales transactions. "This practice must be corrected because it contributes to the continuing downward spiral in home prices, forestalling the economic recovery," Robson says.
FHA ISSUES CONDO PROJECT APPROVAL GUIDANCE
New regulatory guidance designed to streamline the Federal Housing Administration's approval process for condominiums nationwide is expected to have an immediate impact in the state of Michigan, where single-family projects are frequently developed under a condominium structure, according to NAHB.
While most of the new rules announced on June 12 by the U.S. Department of Housing and Urban Development will not take effect until Oct. 1, a provision that eliminates the need, will take effect immediately, opening the door for thousands of home buyers to use low down payment FHA financing to purchase new single-family homes.
"With FHA loans becoming an increasingly significant share of the market, this new rule will help homebuilders in Michigan and other areas to sell more new homes to buyers who are having difficulty obtaining conventional financing," says NAHB Chairman Joe Robson. "We are hopeful this will provide a much-needed boost to struggling housing markets such as Michigan's."
In addition, HUD's Mortgage Letter 2009-19 authorizes certain FHA approved lenders to review and approve condo projects internally. It also streamlines the environmental review requirement for condo projects while setting presale and owner-occupancy requirements at 50 percent.
With the economic downturn and an acute shortage of low down payment mortgage money, FHA has become increasingly popular among young buyers. Under the FHA program, consumers can put down as little as 3.5 percent on the purchase of their homes.
NEW HOME SALES VIRTUALLY FLAT IN MAY
Sales of newly built, single-family homes in May held virtually even with the previous month, declining less than one percentage point to a seasonally adjusted annual rate of 342,000 units, according to data released by the U.S. Commerce Department.
"In the midst of the prime home buying season, builders report that a number of factors are limiting new-home sales. These include consumer concerns about job security, potential buyers' inability to sell their existing homes, and problems with appraisals coming in too low," says Joe Robson, chairman of the National Association of Home
Builders (NAHB) and a home builder from Tulsa, Okla. "The latter issue is directly related to the use of distressed properties-foreclosures and short sales-as comps, which disproportionately impacts assessed values of nearby homes."
"Today's report provides further evidence that the recovery is going to be a slow one as the housing market continues to bump along, trying to find a bottom," adds NAHB Chief Economist David Crowe. "The good news is that, even as the sales pace leveled in May, inventories of unsold new homes continued to shrink for a 25th consecutive month-a trend that is helping bring supply and demand into better alignment and thereby setting the stage for an eventual market recovery."
New-home sales declined 0.6 percent in May. Meanwhile, the number of new homes for sale fell 2.3 percent to 292,000, which is a 10.2-month supply at the current sales pace.
Regionally, the decline in new home sales was entirely focused on the South, where sales fell 8.5 percent for the month. Sales of new homes rose 1.3 percent in the West and posted double-digit gains of 28.6 percent and 18.6 percent in the Northeast and Midwest, respectively.
FHA TAX CREDIT MONETIZATION HELPS HOME BUYERS WITH UPFRONT COSTS
First-time home buyers who would otherwise qualify for the $8,000 tax credit but don't have the money for a down payment or closing fees may now be able to get a loan to help cover those upfront costs.
The U.S. Department of Housing and Urban Development (HUD) announced on May 29 that the Federal Housing Administration (FHA) will allow state housing finance agencies to provide second mortgages "monetizing" the tax credit so that borrowers can use the funds toward their down payments and closing costs for the purchase of homes with FHA insured mortgage loans.
"This is great news for thousands of families who want to take advantage of today's low interest rates, competitive prices, great selection and the federal tax credit that is only available until Nov. 30, but could not save enough money for a down payment and closing costs," says Joe Robson, chairman of the National Association of Home Builders.
HUD also announced that FHA approved lenders may purchase the tax credit from the home buyer in advance, so that the home buyer can use the funds for closing costs or to make a down payment in addition to the 3.5 percent minimum. Home buyers who go directly to FHA approved lenders will still need to come up with the 3.5 percent minimum down payment that is required for an FHA insured loan.
Previously, home buyers would have been able to use the funds from the tax credit only after filing their federal tax returns and would have had to come up with the pre-purchase costs on their own.
NAHB estimates that 40,000 more homes will be purchased due to the new FHA monetization program, in addition to the 160,000 sales already expected as a result of the tax credit.
NAHB News is excerpted from recent National Association of Home Builders media releases provided by the association for distribution to the public. For more information, visit www.nahb.org.
