By Erica Elliott

Unless you have experience as an actor, you may not be aware that it is thought to be bad luck – really bad luck – to speak the name of one of William Shakespeare’s most performed plays inside of a theatre. Productions of Macbeth have been plagued with over 400 years of unmitigated catastrophes, so much in fact, that unless actors are rehearsing or performing the play, quoting it is expressly forbidden and even the mention of the title is thought to bring disaster. Actors will instead call it “The Scottish Play” (as it is set in Scotland) and refer to the title character as “The Scottish Lord.”

            The play is believed to be cursed, and while I don’t necessarily buy into it, the evidence presents a pretty good case . The legend surrounding the curse states that Shakespeare used actual Wiccan incantations in the play’s text, thus angering evil spirits. If someone quotes “The Scottish Play” inside the theatre, or refers to it by name, there are steps of recourse the offender must take, which include spitting on the ground, turning around three times, and reciting a line from Shakespeare’s Hamlet, “Angels and ministers of grace defend us!”

            It may sound odd, but actors get very paranoid about this curse, and theatre accidents are often attributed to the curse of that Scottish play. It’s not illogical to assume, however, that the paranoia more than the curse may cause such accidents to occur.

            Now, by this point, you may be wondering what this all has to do with real estate. This paranoia and fear surrounding the curse of Macbeth has resulted in some serious accidents. Much the same way, the paranoia and fear surrounding the current real estate market can be dangerous. I’d like to talk about a word that makes real estate agents (and economists, and investors…) a little paranoid and scared, the “R” word. That’s right, Recession. It’s being used a lot in the media lately, without much quantitative substantiation to support the claims.

            The very existence of this word is a Catch-22. The first speculative pundit to mention “recession” should be beaten, because once its brought up, the conversation goes like this:
News Anchor 1: Well, looking at the polls, the Republicans/Democrats/Purple People-Eaters are gaining speed against the incumbent party. What would really trip up [insert incumbent candidate/party name here] is if we headed into a recession…

Sooner or later, news broadcasts start off saying things like, “We’re starting to hear a lot of talk about recession…” Suddenly, all this recession-talk in the news has people scared, and little things (i.e. dips in the stock market, a bad month or two in the housing market) have consumers fearing that we are indeed going into a recession, just like everyone says! Consumer confidence suffers, people stop spending money, and BAM! – recession .

            If my Macbeth analogy didn’t quite do it for you, maybe this next example will: Have you ever told a seven-year old a horror story right before bed? I found that if you want to guarantee a child will not go to sleep, telling them a horror story about the boogieman will pretty much do it. They lay awake in bed, thinking about your story over and over again, until they run out of their room, convinced they saw a monster in their closet. I think this is a fairly decent analogy, except in this example, the media is the babysitter, you and I are the seven-year old kid, and the fear of a recession is the boogieman. Whether there’s a monster in the closet or not, people get scared and run out of their bedroom (read: stop buying houses, pull their money from investments, etc.). This is how fear of a recession, causes a dip in consumer confidence, which leads to decreased spending (because people are scared), which triggers an actual recession .

            This is ridiculous. Let’s look at the GDP growth for 2007: 1st Quarter: +1.3%, 2nd Quarter: +3.8%, 3rd Quarter: +3.9%.

I’m not seeing a recession yet.

Let’s look a some numbers:

Sources of real GDP growth in the 3rd Quarter:

• Personal consumption growth rebounded to 3.0 percent after rising 1.4 percent in the second quarter.
• Goods export growth was the largest since the fourth quarter of 1996.
• Real disposable personal income – income adjusted for inflation and taxes – increased 4.4 percent in the third quarter, compared with a 0.6 percent increase in the second quarter. The higher growth rate reflected the decline in inflation.

It is your job as a real estate professional who is armed with actual knowledge to shine your flashlight into the closet and show your clients that there is no boogieman hiding in there. If all else fails, the next time you hear someone use the “r” word, from here on out labeled as “the word of which we will not speak,” spit on the ground, turn around three times, and start reciting lines from Hamlet.

Economics 101
A crib sheet on economics to help you talk to clients about the market!

What is the Housing Affordability Index (HAI)?
The housing affordability index (HAI) reflects consumers’ ability to purchase a home.

It takes into account:

• home prices (higher prices hurt affordability)
• mortgage rates (higher mortgage rates hurt affordability)
• family income (higher income helps affordability)

The index is produced by the National Association of Realtors® (NAR) monthly and quarterly. A similar, more-defined quarterly index covers first-time buyers.

What is its relative importance?
Medium. The index's importance increases when economic growth is thought to be near a turning point—up or down. The index is used in conjunction with other economic reports to gauge the direction and strength of the economy, and what the Federal Reserve might do next with short-term interest rates.

What impact does it have on the market?
In general, rising index readings can depict economic strength. Declining readings typically reflect economic weakness.

How is it used?
The index helps analysts understand consumer's ability to purchase a home. The monthly index tends to receive the most attention because of its timeliness. It's also valued because it breaks the index down by mortgage type and geographical region.

The housing affordability index warrants special attention for several reasons.

First, falling mortgage rates can actually improve affordability when the overall economy is growing below its potential. Mortgage rates are closely tied to the yield of the 10-year Treasury note, which is tied to expectations of inflation and economic growth. If inflation or economic growth expectations or both are subdued, the yield of the 10-year Treasury note usually falls, thereby bringing mortgage rates down to more affordable levels. Yet, inflation typically has a greater affect on the movement of the yield of the 10-year Treasury note and mortgage rates.

For example, if the economy is expanding at a solid pace, supported by robust productivity growth, inflation would likely be contained. This could keep the yield of the 10-year Treasury note subdued and mortgage rates relatively affordable.

Home prices are also affected by the health of the economy. If the economy is strong, it likely means home prices are rising. But is this necessarily a bad situation? It probably isn't for consumers in general because family incomes could also be rising, thereby improving home affordability from that perspective. Furthermore, it clearly isn't a bad situation for established homeowners because they build greater equity and that provides a source for consumer spending.

Let’s do the numbers…

Housing Affordability Index

Read this chart like an expert with your newfound skills from this week’s Economics 101.

In the News…

Banks find a subprime silver lining
By Tyler Cowen, professor of economics at George Mason University
Source: Marketplace on National Public Radio
We've all heard about the defaults on subprime mortgage loans. But so far, the real story is how little the broader American economy has suffered. That is partly because of sophisticated trading networks.
More than ever before, banks can spread their financial losses very broadly, including to foreigners.

In the old days, banks lent out mortgage money and kept those loans on their books. If enough borrowers could not repay, the bank went out of business. That was a big problem in the Great Depression of the 1930s.

Today, banks usually sell their loans to third parties -- this is called "securitization." You might have originally borrowed money from Wells Fargo, but now a bank overseas cashes your mortgage checks.
If a large group of people can't pay their mortgages, they might lose their homes. But the banks don't suffer as they used to -- local American lenders have already converted those loans into cash and sold off their risk.

In fact, German regional banks suffered some of the most significant losses from bad American mortgages. Other European and Asian banks and hedge funds took their lumps as well. American banks essentially bought insurance by exporting their risk overseas.

So far, we don't know the total damage from subprime failures, but it probably is less than 1 percent of the American economy. Those are big losses if concentrated in a few institutions, but the global or even the U.S. economy can handle them. Lots of American domestic banks have suffered losses, but there have been no massive failures.

Now European real estate markets are weakening. Soon some American banks will be returning the favor and bearing some losses for others. But we're still better off for sharing our risks, and that is why most U.S. stock prices remain high.

            You're hearing lots of bad economic news from the media. The secret is that we're learning to cope with it better each time.

NAR: Recovery for Existing-Home Sales in 2008

A modest recovery for existing-home sales is expected in 2008 as the impact of the credit crunch subsides, while pending home sales indicate near-term stability, according to the latest forecast released here today at the National Association of Realtors® Conference & Expo.

Lawrence Yun, NAR chief economist, said the housing market will improve from a steady unleashing of pent-up demand, and from a wide abundance of safer mortgage products. “The level of pent-up demand reaching the market next year is a bit uncertain, and it is possible for even higher home sales activity than we’re forecasting if buyers regain their confidence about the long-term benefits of homeownership.  Over the near term, home sales are likely to be fairly flat as the lingering impact of the credit crunch filters through the system through the end of the year.”

Existing-home sales are projected at 5.67 million this year, edging up to 5.69 million in 2008, in comparison with 6.48 million in 2006 which was the third highest year on record.  Existing-home prices are expected to decline 1.7 percent to a median of $218,200 for all of this year and hold essentially even in 2008 at $218,300.

“Some markets are still going strong, such as Austin and Raleigh, while others are showing early signs of recovery, like Denver and Boston.  However, a vast portion of the nation’s mid section is underpriced in relation to income, and prices in some markets could rise notably with good local job gains,” Yun said.

 “Contrary to perceptions, conventional mortgages are widely available at favorable interest rates for the bulk of home buyers,” Yun said.  “The pricing and availability of jumbo mortgages has improved, and FHA loans for home purchases – up 58 percent in the third quarter – are replacing subprime mortgages to serve the needs of low- and moderate-income buyers.”

            “Home buyers in it for the long haul nearly always come out ahead in building wealth. Given the leverage in purchasing a home, the average return on a 5 percent downpayment over 10 years is usually three to five times greater than stock market returns,” he said. “When people compare investment returns, they often overlook the power of leverage in the housing market.”

Yun said a $10,000 downpayment on a median-priced home, at a typical appreciation rate of 5 percent, would be worth $110,000 after 10 years.  That same amount invested in the stock market for the same amount of time, assuming 10 percent annual appreciation, would be worth $23,600. “That’s why housing is the best long-term investment most families ever make – the longer you own, the better your investment,” he said.

NAR: 2007 is Fifth Best Year on Record
In 2002, home sales set a new record at just over 5.5 million, and three-quarters of metro areas showed price gains over the previous year. At the time, home buyers were confident that the real estate market was strong and healthy. In 2007, existing-home sales are forecast to be about 5.5 million, and two-thirds of metro areas showed price gains last quarter. Both 2002 and 2007 show strong sales, and homes continue to prove a good long-term investment. But this year, public perceptions are different.

“In some ways, the extended real estate boom from 2001 to 2005 created unrealistic expectations that housing is a short-term high-yield investment,” said NAR Chief Economist Lawrence Yun. “2007 will be the fifth best year for housing on record. Places like Houston, the Kansas City area, Indianapolis, and the vast middle section of the United States offer affordable prices and continued job growth. On either coast, Seattle and Raleigh, N.C., remain solid. And markets that experienced recent growth declines – like Boston, Denver, and Washington, D.C. – have already shown signs of recovery. In short, all real estate is local – conditions vary greatly from one city to the next.”

Yun explained that while the recent rise in foreclosures and delinquencies has dampened consumer confidence in real estate, these problems have been concentrated in the subprime market. “For buyers who qualify for conventional financing, mortgages are available at favorable rates,” said Yun. “Major FHA reform will also help first-time home buyers enter the market and will provide safer alternatives for many subprime buyers. FHA market share for home purchases is expected to triple over the next three years, from an estimated 4 percent in 2007 to an estimated 12 percent in 2009.”
Responding to recent questions about the current value of homeownership, Yun said, “Buying a home is not a quick-in, quick-out investment, like buying a stock. Homeownership builds wealth over the long-term.”

To illustrate his point, Yun explained that over 10 years, a $10,000 investment in the stock market at a normal 10 percent market rate of return would yield $23,600. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5 percent would return nearly 5 times the stock market return, at $110,300.

Buying a Beach House?
Vacation homes are becoming affordable again.
Dreaming that falling real estate prices have finally brought a vacation home within reach? Could be.  
After years of double-digit growth, prices in popular spots like the Florida Keys and Palm Beach have dropped 10 percent over the past year, according to Fiserv Lending Solutions. Home values in beach markets like Cape Cod and Cape May, N.J. and mountain destinations such as the Berkshires in Massachusetts have also started to turn down.

Of course, the ugliness may not be over in every beauty spot, says Celia Chen, director of housing economics at Economy.com. In Phoenix and Fort Lauderdale, for example, her firm is projecting 12 to 20 percent price drops from the peak - but much of that decline is still to come in 2008.

The best deals may be in destinations that buyers overlooked during the boom, says Christine Karpinski, author of How to Rent Vacation Properties by Owner. Those include the Adirondacks in New York, the White Mountains in New Hampshire, the Great Smokey Mountains in Tennessee and the Florida Panhandle. "The opportunity is awesome as long as you buy in the right places for the right reasons," she says.

But just as the window is starting to open on vacation-home prices, another one is slamming shut: financing. The mortgage crisis has sapped the confidence of once eager lenders. When you set out to pay for a second home today, you'll have to work within these rules:

Show them the money, and lots of it

At the height of the mortgage craze, lending guidelines were so loose that a down payment was seen as optional. Not anymore. You'll need to put down at least 10 percent and more likely 20 to 30 percent to nab your beachfront or mountainside prize.

"You can still buy a primary residence with 5 percent down. But getting the best terms on a second home requires much more," says Greg McBride, senior financial analyst at Bankrate.com.

Really, show them your money

For lenders the mantra today is don't trust, verify. Stated income loans, popularly known as liars' loans, are history. Expect to be asked to produce proof of your income. When it comes to affordability, lenders want to see that you earn enough to sustain payments on two loans - and don't want to see your total housing payments (first and vacation) top 40 percent of your income. At the height of the boom, that cap was more like 55 percent.

Back up your claims

If you need to rent out your home to afford it, count on lenders taking a hard look at how much you plan to charge. You may have to spend $500 to $1,000 for an appraiser to do a rental analysis to make sure your assumptions are reasonable.

Make it a permanent vacation

When you borrow, think about long-term affordability, even into retirement. No one really knows when vacation-home values will hit bottom. You can't count on price gains to bail you out of an expensive loan.

    "This isn't the kind of market where you can flip and make millions," says Karpinski. Even so, if you land financing, it may be the kind where you can find your dream house.

Looking to Sell a Home During the Holidays?
By Erica Elliott, requested contribution for The Huntsville Times
The holidays can be a great time of year to sell your home. While many real estate agents advocate waiting until February to put a house on the market, statistics from the North Alabama Multiple Listing Service (NALMLS) show November and December to be stronger selling months than January and February. In 2006, the average number of homes sold per month was 1,068. There was only a slight decrease in sales during the holidays, with 931 homes sold during November and 915 sold during December. The true decline in sales is actually during January and February, when people are taking time to recharge from the holidays. January 2006 saw a 31% decrease in sales, with 734 homes and February was just under December with 914 homes sold. Sales of existing homes accounted for 91.4% of sales in November and 91.8% of sales in December, as sales in new home construction.

The advantages of putting your house on the market during this time of year can oftentimes outweigh the disadvantages. During the holidays, sellers will not see as much traffic from people who are “just looking.” Buyers that are looking tend to be more serious, and they have more time to shop together, which is an advantage over other times of the year. Sellers may get dismayed easily, as a result of the slower traffic; however, they should keep in mind that it’s the quality of buyers versus the quantity. In addition, while families with children often prefer to wait until summer to move in order to avoid relocating during the school year, the break between semesters is a convenient time for moving as well. For both buyers and sellers, an advantage to holiday real estate transactions is that real estate agents, as well as lenders, home inspectors, appraisers, and title companies, have more time to spend with clients than at busier times of the year.

Homes that are decorated for the holidays can move buyers to look past any flaws in the home and imagine themselves living in the house. An important tip for sellers is to be tasteful in holiday decorations, as there is the potential for alienating buyers with overwhelming accessories.

The biggest problem sellers face during the holidays is going to be the stress of putting a house on the market, combined with the stress that normally accompanies this time of year. It is of the utmost importance that you keep your home immaculate so it shows well to prospective buyers. As a result of this stress, listing a home during the holidays is not for the faint of heart.

The important thing to remember when you are contemplating whether or not to sell your home is your motivation. If you need to move, regardless of the time of year, it’s always a good time to put your home on the market. If you are contemplating putting your home on the market “just to see what happens,” real estate experts advocate that you wait until you are truly motivated.