Sellers’ price-cutting trend could be good news for buyers

Kenneth R. Harney on Aug 24, 2018

WASHINGTON – You might be relaxing at the beach or in the mountains, but if you’re considering purchasing a home in the coming months, you should be aware of an important shift emerging in the market- List prices on growing numbers of houses are being cut, even in places where previous appreciation has been strong and sales at record levels. The great American post-recession housing-price boom appears to be losing at least a little of its ooomph, opening opportunities for alert buyers.

New research released last week by realty marketing site Zillow found that one of every seven listings (14 percent) across the country saw a price reduction during June, the latest month covered by the study data. The rate of reductions was higher than it’s been in some markets for years. In Seattle, which has been scorching hot – with multiple offers and double-digit appreciation routine – 12 percent of listings got a price reduction in June, the highest rate since 2014. The median cut was 3.1 percent.

Some of the largest cities and their suburbs are also seeing growing numbers of price adjustments-

- Nearly one of every five listings in Chicago saw a price cut averaging 2.7 percent in the survey.

- In the Washington D.C. metro area, 15.4 percent of all listings had price reductions that averaged 2.5 percent.

- In Miami-Ft. Lauderdale, the average decrease was 2.9 percent; metropolitan New York, 3.6 percent; Boston, 3 percent; San Francisco, 4.2 percent; San Diego, 2.3 percent; Charlotte, North Carolina, 2.4 percent; and Columbus, Ohio, 2.7 percent.

In San Diego, one of every five listings got pared back in June, a significantly higher rate than had occurred the year before, when one of every eight listings (12 percent) was reduced in price.

Of special note here- Reductions are occurring most frequently at the upper end of the price spectrum, where the average share of listings with cuts jumped to 16.2 percent. Lower-priced homes actually have seen a small decrease in the percentage of listings with reductions. Overall, according to Zillow, home-price appreciation is slowing in nearly half of the country’s 35 largest metropolitan markets.

Zillow’s study dovetailed with new research by realty brokerage Redfin, which found slowdowns and price softness in the upper-end, luxury segments – the top 5 percent most expensive homes – of some cities and suburbs. In Boston, luxury sales prices slumped by 16.7 percent year-over-year in the second quarter, compared with a 9.7 percent average increase in the non-luxury segment. Overall, however, luxury home prices increased nationwide by about 5.2 percent, down from 7.3 percent the previous quarter.

What’s going on? Multiple factors are at work. The recovery from the recession and housing bust has been underway since at least 2012. But every major up-cycle in home prices eventually runs out of fuel because buyers’ incomes can’t keep pace with price increases. Once buyers begin balking, sales start to soften – note that June saw existing home sales nationwide on the decline for the third straight month – and inventories of available properties slowly begin to accumulate. Inventories of listings at the entry-level price range generally remain low and continue to sell fast, sometimes with multiple offers. But upper-bracket listings tend to be relatively more available and sell more slowly. Sometimes it takes six to 12 months to sell them, according to Lawrence Yun, chief economist of the National Association of Realtors.

Jonathan Miller – a nationally known appraiser active in metropolitan New York, Philadelphia, Miami and Los Angeles – told me the pattern he sees almost everywhere is “soft at the top” tier of the price spectrum and “tighter as you move lower in price.” He advises potential buyers to keep a close eye on local sales statistics, because declining sales point to more price reductions in the future.

Here’s what could be another emerging trend, which turned up in the Redfin luxury sales study- Small but noticeable numbers of homeowners who live in high-cost, high-tax states such as New York and California appear to be fleeing to lower-tax markets. Some communities in Florida, Nevada and Washington are seeing unusually large price jumps in sales of upper bracket homes. Buyers aren’t reticent about their reasons either- Congress’ $10,000 cap on deductions of state and local property and incomes taxes. You might think local taxes are no big deal for well-off owners, but consider this- One house listed for $12 million in Massachusetts came with a $101,346 local real-estate tax bill.

Ouch!

Escrow-free loans raise credit-risk questions

Kenneth R. Harney on Aug 3, 2018

WASHINGTON – Do you really need an escrow account attached to your mortgage? Aren’t you capable of remembering when it’s time to pay tax and insurance bills? These questions suddenly are more controversial than you might guess.

A new program offered by one of the country’s highest-volume lenders allows a wide swath of borrowers to say no-thanks to escrow accounts, at no charge. More importantly, the escrow-free option is open to borrowers who have dings in their credit histories and are making small down payments.

Traditionally, borrowers granted waivers from mandatory escrow accounts have had good to excellent credit scores and substantial down payments – often 20 percent or more. Opening the door to escrow-free status for borrowers who don’t fit this profile is raising eyebrows in the mortgage field. Michael Fratantoni, chief economist for the Mortgage Bankers Association, told me it would be “a troubling development” if large numbers of new buyers with sub-par credit opted out of escrow accounts, exposing them to potential problems down the road.

A little background here- Escrow (or impound) accounts are standard features on many conventional home mortgages in the U.S. They require the borrower to deposit money in advance for later payment of local property taxes and hazard-insurance premiums by the lender or loan servicer. The idea is that individual borrowers are more likely to forget – or otherwise fail to pay – insurance and tax bills that come due annually or semi-annually. Failing to make those payments exposes the property to foreclosure, endangering the lender’s collateral and the owner’s equity.

Waivers of escrow requirements are possible for borrowers who meet lenders’ criteria on financial capacity and credit, subject to a fee – often one-quarter of a percent of the loan amount.

A program now being introduced by United Wholesale Mortgage, the country’s largest wholesale lender, departs from the traditional approach to escrows- It allows conventional loan applicants who have significant dings to their credit – FICO credit scores of 640 – and who make down payments as low as 5 percent to avoid escrow accounts. The loans are being originated for sale to Fannie Mae and Freddie Mac, the big federally regulated mortgage investors. FICO scores for home-purchase loans at both companies average in the 750s, according to data and software vendor Ellie Mae. UWM has a network of 7,000 brokerage firms with 30,000 individual loan officers, according to the firm. Unlike banks or mortgage companies that have retail operations, wholesale lenders purchase loans originated by third parties, typically brokers.

The idea behind escrow-free loans, according to UWM, is to slash costs. On a hypothetical $300,000 first mortgage, borrowers could save $3,625 – $750 that would otherwise be paid at closing for an escrow waiver fee, $2,500 on deposits for property taxes and another $375 for insurance premiums.

But aren’t there inherent extra risks when buyers with low cash and sub-par credit scores handle their own tax and insurance payments? During the super-easy credit years preceding the housing bust – no or minimal down payments, no documentation, super low credit requirements – many of the subprime loans that ended up in foreclosure had no escrow accounts. When hard times hit, those borrowers found it difficult to come up with large, lump-sum tax and insurance payments and frequently lost their homes.

Mat Ishbia, president and CEO of UWM, told me in an email that this is not the scenario ahead for his company’s new program. “These are all high-quality borrowers that are approved through automated engines at Fannie Mae and Freddie Mac, and verified by our underwriters.” The program saves money and “it’s better for consumers to have options,” Ishbia said.

For its part, Fannie Mae permits waivers under specified guidelines but had no comment on UWM’s loan option. Freddie Mac also had no comment on the program.

Some experts on escrow accounts are highly critical of the idea, however. David I. Ginsburg, CEO of Loantech LLC, a national authority on escrow account audits, says UWM’s program “sounds like we are back in 2008 again. When the next slowdown occurs, those borrowers will have problems, and we know what that will look like.” Paul Skeens, president of Colonial Mortgage Corp of Waldorf, Maryland, called the program “foolish.”

What to make of all this? No question the upfront savings are attractive, especially for cash-short first-time buyers. But they better keep track of their tax and insurance due dates, and build up rainy-day financial reserves to handle economic rough spots ahead.