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Market Commentary
A mortgage meltdown?
How will problems in the subprime mortgage business affect real estate?
Over the past month, problems in the subprime mortgage business have caused major selloffs in U.S. stock markets. The realization has occurred that the risks of default by subprime borrowers (those with weaker credit) have been underestimated by mortgage companies as well as the large financial institutions that invest in mortgages. Investors are bracing themselves for high levels of defaults on subprime mortgages that were written in 2005 and 2006.
How significant is this problem? Over the past 6 months, over 20 large subprime lenders have folded or declared bankruptcy, and several publicly traded lenders have seen their share prices tumble. A recent study predicted that one in five subprime mortgages written between 2005 and 2006 will default (Money Magazine, 3/15/07.) This represents approximately 2.2 million homeowners.
So how will this affect you if you’re buying a home?
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If you have less than perfect credit, you may have difficulty getting a mortgage. Mortgage companies have reevaluated the risks of subprime mortgages and have tightened their lending standards as a result. If you’ve been preapproved for a loan and are looking for a home, double-check with your lender to be sure that there are no problems in underwriting your loan.
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Even if you can get a loan, you may pay a higher interest rate. Investors in subprime mortgages are demanding higher interest rates to compensate for the higher perceived risk of subprime loans.
What if you’re selling a home?
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Tightening credit markets mean that within some price brackets, the pool of qualified buyers may shrink. A decrease in demand may increase the difficulty in selling a home.
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Foreclosures in your neighborhood may reduce your home’s value. According to Allen Fishbein, director of credit and housing policy at the Consumer Federation of America, a single foreclosure could reduce the value of neighboring properties by about 5%.
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Psychology plays a big part in housing markets. Uncertainty in the housing market could create fear among potential homebuyers, causing them to delay home purchases. Fewer buyers mean slower home sales.
However, there are some mitigating factors. The mortgage crisis will affect regions of the country differently, and the Washington and Philadelphia markets are fundamentally strong. Here’s what we see…
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Job strength in local markets helps to minimize mortgage delinquencies. The markets with the highest subprime mortgage delinquency rates are mostly industrial cities in the Midwest, including Detroit, Cleveland, and Akron, each of which has subprime delinquency rates above 20%. The only two non-Midwest cities among the top 10 in delinquency rates are Miami and New Orleans. By contrast, Philadelphia and Washington are expected to maintain steady job growth, and lower delinquency rates are projected there.
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There’s a lot of money out there. At Corus Home Realty, we’ve helped many buyers purchase bank-owned properties. And in conducting these transactions, we’ve found that there are a large number of purchasers seeking out such properties. This strong demand should help prevent distressed properties from languishing on the market, and may minimize the impact on property values.
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Today’s mortgage problems are nothing new. In fact, several lenders we’ve spoken with have pointed out that despite the attention paid to subprime mortgages today, a large number of foreclosures occurred in 2006, and a large number of subprime lenders failed during that year. So, it’s interesting to note that while this was occurring, the real estate market within the Corus service areas of Washington and Philadelphia has actually strengthened.
Market Commentary
Hurricanes and homeowners insurance.
Insurers are canceling policies in storm-prone areas.
This year, homeowners in coastal areas are feeling the legacy of the busy 2004 and 2005 hurricane seasons – their insurance premiums are going up dramatically. Additionally, some insurance companies are refusing to renew policies, and in several cases, insurance companies have stopped writing homeowners insurance policies within entire states.
Florida, Louisiana, North Carolina, Mississippi, Texas, and Alabama are among the states hit hardest, but high insurance rates are also affecting some homeowners in our area. This is occurring along the New Jersey and Delaware shores and even further inland along the Chesapeake Bay. Here are a few specifics:
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Allstate has informed 226,000 Florida homeowners that it will be not be renewing their insurance policies this year. Some of these homeowners had been with Allstate for decades. The company has also ceased writing homeowners policies in Louisiana, Florida and coastal parts of Texas and New York State.
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Locally, Allstate Insurance Corp. has stopped writing new homeowners’ policies in coastal areas of Maryland, citing concerns about a warmer Atlantic Ocean and the possibility of stronger and more frequent hurricanes hitting the Northeast United States.
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It has been reported that many elderly homeowners are “going bare” -- leaving their homes uninsured. Those who have paid off their mortgages may be the most likely to go uninsured. By contrast, homeowners with mortgages don’t have that choice because mortgage companies require borrowers to have insurance. Those whose homes are paid off can drop their policies, unless they are getting government grants or loans that require one.
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Homeowners in Florida, Mississippi, and other states have turned to state-run insurers of last resort. However, these entities generally charge rates that are higher than commercial insurance companies, offer limited coverage, and can have high deductibles.
Events of 2004 and 2005 have caused insurance companies to reevaluate their risk. Some insurers have taken the view that we are a few years into a “hurricane cycle” – a 15 to 20 year period of increased storm activity. It is also possible that global warming may be a contributing factor.
And this reevaluation is not just confined to the Southeast -- insurance premiums are skyrocketing in New England too. The storms of 2005 left many insurance agencies wondering what would happen if the devastation witnessed in New Orleans and Florida happened in the northeast. "The risk of a catastrophic storm hitting the northeast coast is much greater now than it has been in the past," said Michael Moran, director of public affairs for the northeast region for the American Insurance Association.
Additionally, the value of coastal properties has significantly increased over the past 20 years. Development in these areas has been strong, and within these areas, increases in property values have significantly outpaced nationwide home appreciation. As summarized by one insurance expert, “People want to live near the water.”
State and local governments have attempted to mitigate the situation. The Maryland legislature considered (but rejected) a bill that would require Maryland insurers to insure all areas of the state. In other words, if an insurer wished to do business in the state, they would be not be permitted to avoid low-lying coastal areas. However, this measure was rejected on the basis that it might cause some insurers to pull out of the state entirely, thereby worsening the insurance crisis. And this month, Florida Senators Mel Martinez and Bill Nelson have introduced legislation to establish a national catastrophe insurance fund that would commit the federal government to pay extraordinary damages beyond a set amount. That would cap the liability of insurers and make it easier for them to provide affordable policies to homeowners.
Meanwhile, what should you do about this?
First, research the insurability of a home before you buy it. Next month, Corus Home Realty will be adding an “insurance check” as part of its buyer representation. Corus agents will be working with local insurance agents to help purchasers verify the insurability of the home and to flag potential insurance issues.
Second, if you’re purchasing a second home or vacation home, stay financially conservative. Understand that insurance rates could rise, and make sure to budget for potential increases in your premiums. Don’t stretch to purchase that second home when you might find yourself unable to absorb unexpected insurance premium increases.
Market Stats
Today’s real estate market, by the numbers.
Key statistics on real estate markets in Pennsylvania, DC, Northern Virginia, and Suburban Maryland.
Here are the latest real estate statistics for the month of February. All of our figures are from February 2007, and are compared with similar statistics from one year ago. We have several interesting observations:
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Despite the slow real estate market, prices have held steady. Although individual properties (and submarkets) may have declined in value during the past year, the average price for most regions remained flat.
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Average sales prices in Maryland were up 8% during the year. However, this figure is a bit misleading – during the past year, many new properties were completed and sold last month, and the prices on those newer properties carried above-average prices. So in Maryland, know that an 8% jump in average sales price does NOT translate to 8% appreciation on existing home values. Also, our “Average Sales Prices” chart shows that over the last year, prices in Maryland have stayed relatively flat.
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In much of our service area, market inventory is up only slightly over last year – a healthy sign. However, Maryland inventory has jumped by 41% -- spurred in part by an 81% jump in listings in fast-growing Prince George’s County.
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Throughout our service area, new listings are still reaching the market faster than they’re being bought. For example, in the Delaware Valley, 6,569 homes were listed in February, but only 3,248 properties went under contract during the month. This points to a continued buyers’ market throughout 2007.
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Properties’ average days on market rose since last year, with increases ranging from 22% in the Delaware Valley to 79% in Maryland.
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Prince George’s County is slowing down. Even during the slow 2006 real estate market, Prince George’s County remained hot, with properties selling quickly. These statistics show us that the market has considerably slowed there.
Market Research
The first-ever Corus Consumer Confidence Survey
Our first-ever consumer confidence survey shows that homeowners are optimistic about home values.
This month, Corus Home Realty conducted its first Corus Consumer Confidence Survey – an effort to gauge the sentiment of homeowners throughout our service area. We quantitatively track home values and sales activity closely, but we also acknowledge that personal attitudes about real estate can have a big impact on the market going forward. Our survey checks this sentiment in an effort to provide some guideposts in projecting future home value trends.
During the month of March 2007, we surveyed 150 homeowners by phone and asked them three questions:
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What do you believe has happened to real estate values in your neighborhood over the last year?
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What do you think will happen to real estate values in your neighborhood over the next year?
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What do you think will happen to real estate values in your neighborhood over the next five years?
We asked them to respond to each question on a 1-5 scale.
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Go down significantly.
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Go down a little.
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Stay about the same.
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Go up a little.
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Go up a lot.
The results are contained in the charts on the right. With regard to Question 1 (values over the past year) on average, homeowners in Virginia, DC, and the Delaware Valley generally felt that their values declined a little, while Maryland residents felt that their home values stayed the same.
On Question 2 (values over the next year) homeowners in all three areas were mildly optimistic, predicting that values would stay flat or rise slightly. The Delaware Valley was the most optimistic, while the Virginia / DC area was the least optimistic.
Finally, on Question 3 (values over the next 5 years) residents in all three market areas were more optimistic, indicating that real estate values might increase “a little” to “a lot.” As with Question 2, the Delaware Valley homeowners were the most optimistic.
We intend to continue conducting our survey on a quarterly basis.
Home Maintenance
Save your home (again) for less than $100.
Another tiny investment can save you big dollars on flood-related repairs.
In our July 2006 edition of the Corus Report, we reported that extending your downspouts can play a significant role in reducing moisture and potentially eliminating flooding in your basement. This small, simple step can save you thousands of dollars in repairs and lost home value.
Today, we bring you another suggestion. It’s a quick plumbing fix that can go a long way toward preventing a very common household water leak -- clothes washer hose failures. According to State Farm Insurance Statistics, clothes washer hose failures cause approximately $170 million in damages to homes in the United States & Canada each year.
Clothes washers are connected to their hot and cold water supplies by two flexible hoses. These hoses, which are commonly made of rubber, are under constant pressure. They wear over time, and can be vulnerable to rips or tears. These hoses are simple and inexpensive, yet a break in either line can flood a house with hundreds of gallons of water in a very short time.
No solution can prevent leaks with 100% certainty, but there are steps you can take to reduce the probability of leakage.
First, replace the rubber hoses with "no-burst" stainless-steel mesh hoses, available at most local hardware stores. To perform the replacement, shut off the water supply and disconnect the hoses from the clothes washer and the water supply. Connect the new hoses, taking care to check the couplings. Turn on the water supply, and check for any leaks along the length of the hose or at the couplings. This procedure is very easy, and does not require a plumber.
On an ongoing basis, occasionally inspect the area for water leakage. Also, make sure that you are aware of the location of the water shutoff valves within your house, so that you can shut down the water supply quickly in the event of any future leaks.
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