Stephen Le Due, president of Affiliated Mortgage, a Wisconsin-based mortgage broker, doesn’t beat around the bush when talking about the current state of the housing industry:

“Real estate is about to turn into a real business and not a free ride,” he said.

Following a four-year boom, the mortgage industry must now handle the possibility of a significantly negative change. This will be the main topic at the Mortgage Bankers Association’s annual convention this week in Orlando, Fla.

“The practitioners in real estate, mortgage brokers and realtors, will be thinned as rates go up,” said LaDue, who founded Affiliated Mortgage in January 1987, and who started in the industry in 1983, when mortgage rates were in double digits.

While interest rates remain quite low, they are up from the numbers of recent years when they hit levels not seen since the Eisenhower era. Last week, a survey conducted by housing agency Freddie Mac recorded a rise in rates for 30-year home loans - the most common types of mortgages - to 6.10%, an amount not seen in 15 months. Previously, The 30-year rates had been under 6% for mostof this year; their recent rise comes amid expectations that the Federal Reserve will keep increasing interest rates.

The Future of House Prices

Higher borrowing costs are expected to lower the pace of mortgage refinancings and home sales, which would likely in turn slow housing price gains. In 2003, Mortgage bankers processed a record $3.9 trillion of home loans; that number was $2.8 trillion in 2004. This year, many market observers expect the downward spiral to continue with $2.7 trillion worth of mortgages to be underwritten.

Some hints of a mortgage banking slowdown have shown up in third-quarter earnings reports. According to National City Corp. of Cleveland, mortgage banking revenue plummeted to $183 million, from $370 million, a year earlier. Slow sales is also apparent in Commerce Department data, which found that the market for new homes had 4.7 months of supply, the highest for the year, and an indication that houses are taking longer to sell. Existing homes for sale also hit that 4.7 month supply level in August, according to the National Association of Realtors.

“It is no longer a seller’s market,” LaDue said. “The value of a realtor is about to go up because it’s going to be more of a buyer’s market.”

While mortgage rates are just over 6%, Brenda Binczewski, a real estate agent with Carlson GMAC Real Estate in Palmer, Mass., believes the slight rise in borrowing costs may actually prompt some prospective home buyers to snap up homes ahead of any further rate increases. The problem may prompt some people to leave the mortgage banking or real estate businesses - or, even worse, to find their jobs eliminated in staff reductions.

“There is tremendous overcapacity in the business,” said Michael Moskowitz, president of Equity Now Inc., a New York-based lender. “When times get tough it really separates the wannabes from the true professionals.”

There is concern in the business that a slowdown in sales (and in turn, lending) could lead some lenders to make riskier loans in an effort to keep business volumes up. This will be discussed at the mortgage bankers’ meeting, as will technology. Computers are increasingly used to process loans faster and more profitably. Today a loan application for a first-time buyer can be closed in 15 days, compared with 45 to 60 days in the 1980s.

While a completely paperless mortgage application may not be done on a large scale for another five years, technological advances likely will continue to be embraced by mortgage bankers.
For example, lenders likely will rely more on electronic appraisals. This so-called automated valuation uses multiple listing services (MLS) for comparable property prices within a neighborhood to determine a home’s value.

Even as the profitability on U.S. real estate is shrinking due to soaring prices paid for buildings and slowly-rising interest rates, investors will spend $200 billion - a new record - on commercial property this year, according to a survey done by Cushman & Wakefield, a real estate services firm, at an industry gathering in San Francisco.

Despite cooling signs attributed to the real estate market on the residential level, foreign investors, private equity companies and pension funds still see it as a stronger investment than traditional avenues. Since 2000, stocks, bonds and similar options have been viewed as volatile by a legion of investors, and data suggests they are right. The value of the National Association of Real Estate Investment Trusts index, according to the survey, has gained more than 20 percent in the last five years, an extremely healthy return. The Standard & Poor’s 500 index, meanwhile, has fallen 3 percent.

It has been a record growth year for San Francisco, with over $4 billion in closed property sales, second only to New York City. However, home skeptics warn that this market will soon come back to earth, too. Ken Rosen, a real estate and economics professor at UC-Berkeley, said that despite the huge amounts of money flowing into commercial real estate, publicly traded real estate investments are overvalued and due for a fall in the next two years - perhaps a decline of up to 20 percent.

Rosen noted that San Francisco would need to create 15,000 new jobs to “feel healthy” about the current market growth, and that only 8,000 jobs were totaled last year. He said that an 8 percent office vacancy rate and average rents of $50 per square foot are benchmarks for a healthy commercial real estate market, and the current figures are nowhere close. The city’s office vacancy rate at the end of September was 16.5 percent, according to the Cushman & Wakefield, survey, with prime office rents at $31 per square foot.

Despite a projected decline by economists, demand bolstered by hurricane victims caused sales of previously owned homes to hold steady in September. Data released by the National Association of Realtors indicates sales of existing homes remained unchanged at a seasonally adjusted, annual rate of 7.28 million, the same as August and the second-highest monthly total on record. The Association said that without the sudden, increased demand for housing in the aftermath of Hurricane Katrina, the figures would have fallen as anticipated.

Belief that rising interest rates will start to cool off the booming housing market, economists predicted a 1.2 drop in sales during September. With the average 30-year mortgage rates above 6.0 percent nationwide, sales are still expected to diminish in upcoming months. The median U.S. price for an existing home stood at $212,000, up 13.4 percent from September of 2004. This marks a slight cooldown, as a 15.6 percent price increase was recorded in August, compared to the same point a year ago.

Figures show just how drastically Gulf Coast real estate has been impacted by the recent onslaught of storms, compared with the rest of the country:

• Sales plunged by a whopping 85 percent in New Orleans, La., compared to September 2004, but across the state in Baton Rouge, home sales were up 150 percent. Baton Rouge real estate prices have jumped more than 30 percent in the past 12 months.
• In Mobile, Ala., sales increased 75 percent from a year ago and prices are up by 15.3 percent.
• Even San Antonio, Tx., where many of Rita’s victims relocated, saw a 58 percent jump in sales, while prices rose by 13.1 percent over a year ago.

To illustrate the storms’ impact by region, overall sales rose 3.7 percent in the South. In the Northeast, sales rose but by a more modest 0.8 percent. The Midwest and West saw dropoffs in sales of 3 and 4.1 percent, respectively.

Based on recent numbers from the Florida Association of Realtors (FAR), 15,272 existing homes were sold in September 2004 across Florida, marking an impressive increase for this year’s statewide sales of 20,368 in the same month.

However, FAR officials warn that the 33% statewide increase from September 2004 to September 2005 may not be reflective of true market activity. The concern becomes even more palpable when one considers local market increases, such as in Orlando, where existing home sales jumped 40 percent from 2,2,12 in September 2004 to 3,105 last month. President of the association, Frank Kowalski, explained the situation further.

“Home sale closings were clearly affected by the four hurricanes that struck Florida in August and September last year,” he said. “Closings generally occur 30 to 90 days after sales contracts are written. And since most insurers do not write homeowners’ policies when a hurricane threatens, many buyers repeatedly were unable to obtain coverage, which delayed closings. All of this influences the comparisons between the closed sales reported in markets across the state last month and closed sales during September 2004.”

Local Realtor boards/associations, real estate firms and Multiple Listing Services in many areas across Florida also were directly affected by last year’s hurricanes, which in turn impacted the collection of data for several months. In the wake of the storms, resales activity also was impacted when lenders postponed closings for property re-inspections or repairs. Kowalsi added that home sales were still strong and the median price continuing to rise.

The statewide median sales price in September rose 28% to $247,800; a year ago, it was $193,400. Florida’s year-to-date figures show that a total of 197,523 homes sold statewide through September compared to 187,774 homes changing hands during the same period last year, a 5%increase.

After analyzing Home Mortgage Disclosure Act data this week, the Federal Reserve has released findings pertaining to the discrimination of mortgage lenders on racial grounds - an issue numerous sources have brought attention to in recent months. The Fed states that last year, American Indian and Alaska Native borrowers were nearly twice as likely to be overcharged for home purchases, but only half as likely as African-Americans.

According to the Fed’s data, 16.9 percent of American Indians & Alaska Natives received higher-priced, or “unadjusted” lending on home purchases in 2004, compared to just 9.4 percent of whites but a shocking 38.6 percent of blacks. The amounts by which whites and each minority group were overcharged were all roughly the same, however. The study reported that overcharged borrowers averaged mortgage rates 4 to 7.2 percent higher (unadjusted) on their loans than comparable Treasury securities (the instruments used to by the Federal Reserve to price mortgages). The Fed also said that when it factored in borrower-related and borrower-plus-lender-related adjustments, the figures were less drastic.

Compounding the issue is the overall increase in loans to minority groups. Lenders reported $24.9 billion in loans to Native Americans last year, for example, compared to just $14 billion in 2003. Countrywide Home Loans - the nation’s largest lender to American Indians - reported that it boosted Native lending by 50 percent last year, from $2.7 billion to $4.1 billion. The second largest source of loans to Native Americans was Wells Fargo Bank, at $1.3 billion, followed by Bank of America at $1.1 billion and Lehman Brothers Bank at $988 million.

Since the overall mortgage market decreased by a quarter: from $3.9 trillion in 2003 to $2.8 trillion in 2004, this increase is attributed largely to sub-prime lending. Since some sub-prime lenders have been connected to abusive lending, this is a development minority groups may welcome. The alleged discriminatory lending practices of mortgage companies have been criticized by civil rights & consumer advocacy groups, as well as law enforcement officials, in recent months. New York State Attorney General Eliot Spitzer has been suing to continue his investigation of many of the nation’s largest banks, which he claims are in violation of his state’s fair lending laws.

On Saturday, October 22, Developer Sales Group, LLC, opened its new office in midtown Miami. An interactive sales and marketing organization, which focuses on the real estate industry, DSG provides an innovative service - providing the developer marketplace with leads and driving traffic in order to facilitate sales. By bridging the gap between the developer of a subdivision or condominium complex, for example, and its potential new residents, DSG allows buyers to take advantage of first level preferred pricing situations and helps the developer “sell out.”

DSG’s aggressive and interactive marketing campaigns fuel its success. Through prospecting, online marketing, and personal presentations, all agents in their database are contacted and a sense of “buzz” and momentum is quickly created around a new development. Established in March of this year, the company is headed by Michael Internoscia, the firm’s broker and a specialist in market penetration, new project launches and realtor development, and Greg Altshuler, a partner with Colonnade Group, LLC, a real estate development company with its own offices in Miami and New York City.

With signed contracts of over $250 million to date, the dynamic DMG aims to progressively revamp Florida real estate and all other markets within its reach.

Chairman of the Mortgage Bankers Association, Regina Lowrie, announced the formation of a think tank comprised of real estate finance leaders today. It will be known as the Council to Shape Change. The purpose of the organization is to develop a strategic framework that will guide industry and company planning and development for the next decade.

“The last several years have been record years for this industry. The only thing we know for certain is that the future holds change in the U.S. and global economies and financial markets,” said Lowrie. “This Council will assemble leading strategic thinkers in our industry and draw upon broad input from industry practitioners and outside experts to discuss and map out the future of issues fundamental to the industry’s future success.”

The Council will come together for a series of as many as six monthly meetings, which will be moderated by an independent outside facilitator to assure “non-partisan” discussions. The meetings will focus on:

1. Changing borrower profiles
2. The nature of the customer relationship and workforce diversity
3. Credit decisions - who makes them and ho
4. Operational demands and capabilities
5. Capital markets and investor demand
6. Potential changes to industry organization and structure
7. Technology’s impact on these and other topics.

The group - which will focus on trends and conditions that will impact the future structure, scope, products and profitability of the real estate finance industry - will consist of 15 to 20 experts representing all aspects of the mortgage industry and based on position in the mortgage food chain, organization size, channel focus/presence, industry segment and organizational structure. Participants will be announced in November.

“We are very excited about this endeavor, and look forward to developing a vision of the industry that will provide grounding for future decisions regarding business, policy and advocacy,” said Lowrie, who is also the president of Gateway Funding Diversified Mortgage Sources, a source for home equity loans, government loans and home improvement loans.

Worried that, at the peak of the real estate bubble, you might be paying too much for a home? Or that your property may not only appreciate by a smaller amount, but even decline in value in the next two years? You’re not alone. With this in mind, the PMI Group has developed a new formula that it claims detects bloated real estate prices. The Walnut Creek, Calif., company, one of the largest providers of home mortgage insurance, is attempting to quantify the bubble - something we all know exists but can be difficult to monitor.

According to Sunday’s Hartford Courant, the PMI Valuation Index tracks the historical home price appreciation in areas throughout the United States, then breaks down the deviation from historical data in the present-day market. The results have highlighted a number of areas that are extremely overvalued. The expected rise in mortgage rates, along with any local economic decline, could cause price devaluations in such areas, PMI warns.

On PMI’s list of the most overvalued markets in the U.S., we find many of the usual suspects:

• Los Angeles, Calif. — 33.7%
• San Jose, Calif. — 26.5%
• Las Vegas, Nev. — 25.5%
• Tampa-St. Petersburg, Fla. — 23.2%
• San Diego, Calif. — 22.3%
• Phoenix, Ariz. — 22.0%
• Miami, Fla. — 20.5%
• Orlando, Fla. — 19.6%
• Providence, R.I. — 19.1%
• Washington, D.C. — 18.2%

As you might expect, California and Florida real estate, along with a number of other East Coast markets, are priced significantly higher than historical norms and, as a result, might come crashing down to earth. Contrast the above figures with Denver real estate, which is 4.2% undervalued, or Detroit, where prices are 10.3% below where they should be according to the normal growth patterns.

PMI has also implemented a “Market Risk” index that gauges the possibility of decline in the net pricing of houses in the same areas. This statistic not only takes the historical home pricing data into account, but uses a number of other factors - employment, household income, local economic growth - to predict a dropoff in net prices within the upcoming 24 months. By this measure, Boston, Mass., is ranked the most likely (a 55% chance) to experience such a decline. San Diego and Los Angeles are close behind at 54% and 46%, respectively.

Suffice it to say, this is not good news for buyers in these areas. Be sure to use extreme caution when house hunting and be sensitive to the overpricing in these markets. Do whatever you can to receive price concessions from sellers. No one wants to come away with any investment worth less than they paid for it, and with something as expensive as real estate, you cannot afford to take that risk. Another option, of course, is to seek out a more stable area. Indianapolis, Cleveland and Columbus, among other cities, have less than a 6.5% chance of price decline, and are already undervalued, according to PMI’s data.

Midwest, anyone?

A new real estate firm, Brave Real Estate, in Sarasota is attempting to reinvent and reinvigorate the Florida home loan market. While housing in the Sunshine State has been booming - resulting in property values that have more than doubled recently - home sellers are afraid that the traditional 6% real estate commission is expensive and unreasonable.

Until now, sellers were left with two options:

1. “Traditional” full service brokerage firms, which charged as much as 6% or 7% of the sales price
2. “Discount” brokers who charged a lot less, but who also provided very few services, leaving the home seller to perform the majority of the work

Bravo Real Estate plans to supply sellers with a new possibility. It provides full service real estate marketing to home sellers at a drastically reduced price under the motto: Full Service. Half the Cost. Bravo! The company charges 3.99% for its full service MLS marketing program, which includes a 3% co-broke commission offered in the MLS, leaving Bravo with 0.99%. If Bravo sells the listing in-house then the commission is reduced to only 2.99%; moreover, Bravo pays a 1% closing cost contribution to the buyer, motivating buyers to contact Bravo directly and thereby saving the home seller even more money.

Thomas Heimann is Bravo’s CEO and Founder. Before starting Bravo, he built one of the leading real estate sales teams in West Florida as part of the RE/MAX organization.

“Just as in every other industry where increased competition and the Internet have resulted in drastic paradigm shifts and new business models, we feel that the real estate industry is about to undergo a major paradigm shift,” Heimann said. “Consumers are demanding value, and we decided to position ourselves with an entirely different business model and value preposition.”

Aside from a radically different pricing structure for home sellers, Bravo is providing home buyers with a number of exclusive incentives and value prepositions, including an exclusive 18 months buy back guarantee; in essence a money back guarantee for the real estate industry.

This is certainly a new option worth considering from either side of the home selling/buying experience. Consumers should always conduct in-depth research to determine the best value of purchasing or selling a home.

For the first time in four weeks, mortgage applications increased last week. Despite the fact that interest rates on 30-year home loans climbed to their highest levels of the year, the Mortgage Bankers Association stated that its its seasonally adjusted index of mortgage application activity for the week ending on October 14 increased 6.1% to 737.5, up from the previous week’s 694.8.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.09% during these seven days, up 0.11 of a percentage point from the prior week - and 0.01 of a percentage point higher than the previous 2005 high, reached in the week ended March 25.

Meanwhile, the group’s seasonally adjusted index of refinancing applications climbed 4.5% to 2,095.7 - compared with 2,004.9 the previous week.