Mortgage News

The American Dream Suffers a battering

America has had its fair share of bubbles and busts. The dot com boom and bust was spectacular, if relatively short lived. The response of the Fed - cutting interest rates helped to smooth over the problem. The US avoided a serious recession and for most people (unless they had invested their life savings in dot com firms) the issue was of little importance. Furthermore the rapid response of the Fed reassured markets that the monetary authorities were eager to avoid any economic downturn. It appeared that boom and busts were not to be feared.

Against a back drop of very low interest rates, economic growth and a very competitive credit market, there was a rapid expansion in the number of mortgage advances. This enabled a new generation of Americans to buy a house (especially first generation immigrants and people with bad credit histories). Buying a house seemed to be an excellent investment. Not only did you get to own your own house, but, also could enjoy rising wealth as house prices shot up.

Between 2000 - 2006, American House prices rose by 135% encouraging even more to try buying a house.

With house prices rising so quickly, Mortgage companies were willing to lend 100% mortgages and mortgages to people with bad credit history. Mortgage salesmen were encouraged to sell mortgages with little evaluation of ability to pay. In a period of rapidly rising house prices, it was easier to mask poor mortgage decisions.

The boom in house prices also caused an unprecedented boom in building. Housing was the new gold rush. Large homes were knocked down to build several apartments. In particular there was demand for new housing in affluent suburbs, outside of central cities, but, within commuting distance.

The collapse of the housing market and credit crunch have been well documented - see credit crunch explained. In short house prices fell and banks suffered from large scale losses as people simply defaulted on rising mortgage payments.

In many cases, people are simply posting the keys in the letterbox and walking off. Unable to pay mortgage payments and left with negative equity, people prefer to have the home repossessed than struggle to fight a losing battle. The problem is that home repossessions are expensive for banks. Typically, banks may get 40% less than the original loan. It is these loan write offs which are causing the Fed to have to bail out mortgage lenders like Freddie Mae and Fannie Mac. The concern is that with house prices falling and unemployment rising, there are future waves of mortgage defaults still to come.

Sell to Lender

Rather than lose through having to repossess, many banks are encouraging struggling homeowners to transfer ownership. Basically, what this does is to wipe the slate clean. The bank bears the negative equity and takes care of the mortgage repayments. Homeowners are able to sell their house without suffering negative equity. It is also better for their credit rating. For the bank it is not good but, better than the costly drawnout process of repossession.

The housing slump is exacerbated by the number of unsold properties on the market. The boom in housing builds ended only after the market had begun to fall. The result is that even in a time of falling prices, there are still new homes coming on to the market. Faced with a slump in demand and glut in supply, it is not surprising many forecast prices to fall further. At least in the UK we do not have the same glut in supply - just a stagnant market with buyers extremely scarce.

Amidst all the statistics there are many individual cases illustrating the personal costs of the housing crisis. People who have seen the value of their homes drop by $40,000. People who have lost their home, lost their credit rating and left with negative equity. It is an ugly business and the sheer scale of house price falls has taken many by surprise. The question for many Americans is when will the housing slump end? With banks still nervous about lending predicting the end may not be so easy.

Original post by Tejvan R Pettinger

If you think things are bad in the UK property market, spare a thought for the Spanish Housing Market.

The Spanish Housing Market has seen a spectacular boom in the past decades. It hasn’t just been a boom in house prices, but also boom in new supply. Spanish house prices averaged £187,000 in December 2007 - twice as expensive as in 2000. Whereas the UK market struggles to build new houses, planning permission is much easier in Spain. In particular, new homes have been built in touristy areas - often for the British buyer. About 70,000 people in the UK own a property in Spain.

However, there are now signs that the Spanish Market faces a drop in house prices of upto 30%

Although, Spanish banks have been much more cautious about bad credit rating lending, the credit crunch is sill starting to hit the Spanish mortgage industry. Demand is falling from both domestic and foreign sources.

Over Supply. The property boom caused an unparalleled building of new houses. In 2006, the number of new houses built in Spain reached a record 866,000 units (compare that to the 140,000 new houses built in the UK last year). Santiago Aguirre, chairman of property consultancy Aguirre Newman, said Spain had overproduction of up to 1.5 million homes and there had been a “spectacular” fall in sales so far this year, which he assessed at 85 percent. A fall in demand combined with an oversupply on this scale can only lead to a sharp fall in prices. At least the UK has only falling demand to contend with.

In Spain, the construction industry account for 10% of the workforce, compared to 6.5% in the US, this sector is facing a deep recession as demand for new homes dries up. The housing market fall in Spain will have a bigger impact on the economy because it is such an important aspect of the economy.

Although, Spain’s economy is currently expanding and house prices are yet to fall; investing in the Spanish housing market in current conditions seems inadvisable.

Why UK House prices are falling

Homeowners warned of house price crash in Spain

Is Spain heading for a crash at Economist

Original post by Tejvan R Pettinger

Amidst all the talk of falling house prices, it is easy to forget that there is a shortage of new housing starts in the UK.

Recently, the Government’s key adviser on housebuilding, Steve Nickell expressed his concern about the disappointing level of new houses being built in the UK. Steve Nickell who chairs the government backed National housing and Planning Unit NHPAU, used to a be a member of the Bank of England policymaker committee.

In 2007, the number of new housing starts fell to just 166,820 new homes. This is a decrease of 11% on 2006.

Government’s Target for New Housing

Gordon Brown has made a promise to build 3 million new homes by 2020. This involves an annual rate of just under 250,000 a year. However, it is not clear where this extra houses are going to be built. At the current rate there is a shortfall of 70,000 houses a year. Currently, planning permissions for new houses is quite strict. There is the usual problem that people want new houses to be built, but, just not ‘in my backyard’

One guaranteed way for an increase in home building is for the government to restart a programme of building council funded houses. But, currently there seems little political will to make this investment.

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Original post by Tejvan R Pettinger

Home reversion schemes and plans allow homeowners to tap into the value of their house and live in it until their death.

A home reversion scheme means that you sell your house, usually at a discount to an equity release firm. In return they allow you to:

• Live in the home until your death.
• Give a % of the equity in the house, that you can use for your retirement.

At death, the house is sold to reimburse the lender, the remainder of the cash is then distributed to the heirs in the will.

The advantage of Home Reversion schemes

1. Low risk way to borrow money
2. Home value is secured.
3. Attractive in periods of falling house prices or stagnant house prices
4. You can choose between a lump sum and an annual income

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Original post by Tejvan R Pettinger

The recent gains in house prices over the past decade may indicate that the prospects for investors in the UK property market are pretty meagre. In fact some would argue investing in the UK property market would be a bad move because they are now overvalued and are set for a price correction. However, despite the most pessimistic house price predictions there are some reasons to indicate investing in the UK property market may be a good long term move.

Advantages of Investing in UK Property

1. The ratio of house price to incomes has increase, but, it is not completely unsustainable.
   Lower long term interest rates. Since independence of the Bank of England average base rates have been lower making borrowing relatively cheaper than previous decades. In the foreseeable future we are likely to see the continuation of low nominal interest rates
2. Historical Gains in the housing market. According to Nationwide statistics UK property prices have increased by 9.28% since 1953. This increase offers better returns than savings in a bank and investing in the stock market
3. Shortage of Supply. Although temporary demand side factors may reduce house price growth. Long term factors suggest the UK will continue to experience a shortage of supply. This will push up long term prices of homes in the UK (more…)

   Original post by Tejvan R Pettinger

With house prices on both sides of the Atlantic falling, those wishing to sell their house are placed in a more difficult situation. Although, it is currently a buyers market there are some tactics that can be used to maximise your selling price.

Choose Right Valuation.

Just because house prices are falling, don’t despair and set a price that is undervalued. At the same time, avoid being greedy and setting a price that is too high. Take several valuations and choose one in the middle. You need to choose a fair price which will encourage others to come and view. If you get enough people viewing the competition may push up the prices.

Compare with Similar Properties.

The housing Market can be a highly localised affair. Sometimes, even though national house prices may be falling, certain areas can hold their value. Even, within one large city, house price valuations may be moving in different directions. Therefore, it is important to get an idea of the local market. To get a real feel for the local property market, take time visiting estate agents and even visit other houses on sale. Look at the valuation placed on other houses and judge a competitive price for your own. Looking at other properties will also give you a good idea about what works well for selling houses and what puts a prospective buyer off.

Increase Value of Your Own House as Much As Possible.

There are several things we can do to increase the selling value of the house. Many of these are common sense, but it can be surprising how many homeowners don’t take advantage of them. (more…)

Original post by Tejvan R Pettinger

As the saying goes - There are lies, damned lies and statistics.

It seems that there are no end of statistics about the housing market, some of which can seem a bit contradictory.

At the moment there is a general assumption that UK House prices are set to fall and are vastly overpriced. However, before you rush out to sell your house, there are a few things worth bearing in mind.

1. House prices are not significantly above long term average compared to earning.

Graph of House Price Affordability 

• I should point out that this graph finishes in 2005, and since 2005 house prices have increased considerably. Therefore the ratio of house affordability is higher than this graph shows.
• If you had chosen 1995 as the starting point of the graph, of course, things would look a lot different, (in 1995 the affordability of housing was at an all time low) Even since 2003, there has been a considerable increase in the ratio of house prices to earnings. (See ratio of mortgage costs to earnings for first time buyers)
• However, compared to the peak in 1990 house price affordability is not that bad.

Why are House Prices Still Affordable despite House prices doubling in the past 5 years.

There are two factors which determine the cost of buying a house.

1. The actual house price
2. Interest rates, which will determine the monthly repayments. (more…)

   Original post by Tejvan R Pettinger

The UK housing market is very significant for both the economy and the general population. Housing is the biggest form of wealth and also the biggest cause for financial difficulties. In the recent housing boom there have been clear winners, but, there have also been clear losers. These are my recommendations for a more equitable and efficient housing market.

More Flexibility in Supply

Increasing supply of houses, especially in property hotspot areas is important for dealing with the fundamental imbalance between supply and demand. Greater flexibility would prevent future rapid house growth caused by a bottleneck in supply. Admittedly increasing supply is easier said than done. However, I believe the government should take the initiative in building good quality council homes. - for either sale or renting to low income households.

Deal with Scandal of Empty Houses.

It is estimated that there are nearly estimates that there are 840,000 empty homes in the UK ( Empty Homes Agency) The National Land Use Database figures suggest there could be a further 420,000 homes in commercial properties. Making use of empty homes would go along way to relieving the shortage of supply, without the environmental costs of building in green belt land. (Why are they empty?)

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Original post by Tejvan R Pettinger

Buying a house can be one of the most stressful events that people take part in. Unfortunately, there is no guaranteed time to complete the process of buying a house; it will depend upon many factors. However, if you are lucky and things go smoothly then it may go through in 5 weeks time from putting in an offer to completion.

Time to Buy A House

Pre offer Stage - Looking around for properties and putting in offers. This period can take several weeks. It is best not to rush it, but also, it is best not to endlessly wait for the ‘perfect house’ This period is also a good time to arrange a mortgage, so it can be put into place when you buy.

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Original post by Tejvan R Pettinger

The law now requires homesellers to have a home information pack HIP when selling your house. From 14th December you can have one in the pipe line but that wouldn’t impress me as a buyer. From June you will have to have one from when you start marketing so here are some quick tips.

Quick Tips For Home Information Packs

• Make the HIP part of your sales process so it should be professional and give confidence.
• Consider a strong brand to supply the HIP – a recognised name would be more appropriate than ‘Forced to do it flashy Hip Co Ltd’
• If your estate agent or mortgage provider offers a ‘free Hip’ make sure you understand all the terms and get out clauses. There are so many ups and downs with house sales it is best to be prepared
• Also be prepared for suppliers to use the Hip to advertise there services with logos etc. (more…)

  Original post by Tejvan R Pettinger