This post first appeared on Minyanville.

The Obama administration is busy touting the burgeoning success of its mortgage modification program. Unfortunately, it’s a farce: Out of one side of his mouth, the President touts a dedication to the besieged middle class, while from the other, lauds a loan modification program which steals money from struggling homeowners in favor of banks — already the recipients of billions in taxpayer-funded bailouts.

The ploy would be amusingly hypocritical if it weren’t so sad.

According to the Wall Street Journal, the Treasury Department claims that the Home Affordable Modification Program, or HAMP, has begun more than 650,000 so-called “trial modifications” since its inception this February. The commonplace explanation for the latest in a host of failed mortgage modification schemes is that it’s a natural first step to getting struggling borrowers back on the regular monthly payment track.

HAMP mandates that in order to qualify for a permanent loan modification, borrowers must first complete a trial period of three months with lower payments, in addition to submitting the proper documentation required for a more permanent solution. On the surface, this seems logical, even fair: Only after a show of good faith should homeowners be allowed a second chance.

Lenders like Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM), and Citibank (C), however, are required to show no similar evidence of good faith.

And I’ve yet to read a news story that accurately describes how this program works: Even as banks ask borrowers to cough up monthly payments on a house that’s likely to be hopelessly underwater, the foreclosure process continues.

Notices of default turn into notices of trustee sale, which turn into trustee sales, which turn into repossessions and eventually evictions. Meanwhile, as the homeowner is given a false sense of security that scraping together payments each month could save his house, lenders are under no obligation to grant a stay of foreclosure.

In other words, banks determined to take a loan through the foreclosure process can easily — and with Washington’s blessing — grant a trial modification which allows them to pinch a final three months of payments from homeowners already on the verge of financial insolvency, while offering nothing more than an empty promise in return.

To be sure, many of these homeowners got themselves in over their heads by overextending their debt load on an overpriced home. Foreclosure, in some cases, is a reasonable solution.

But an initiative touted as a long-awaited success in the battle against foreclosures is in fact just another way for Washington to redirect money from the pockets of ordinary Americans — however economically downtrodden — to big banks surviving solely by suckling the government teat.

This post first appeared on Minyanville.

It seems that with each passing month, the data gods deliver more and more evidence that the woe begotten US housing market may finally be emerging from its years-long doldrums.

Existing home sales: Up.
New home sales: Up.
Pending home sales: Up.
Home prices: Down, but at a slower pace.

Even a relic from the booming housing markets of yesteryear has reappeared: Bidding wars.

To be sure, multiple-offer situations are concentrated in lower priced markets, but some sales are simply mind-boggling. Here’s a sampling of just how out-of-whack supply and demand truly are in some of this country’s real estate markets:

Costa Mesa, California: Home gets a whopping 68 offers and sells for nearly $100,000 over asking (list price of $399,000, sale price of $495,000).

Manatee County, Florida: Home gets 27 bids, list price $124,000.

Phoenix, Arizona: Home gets 11 offers, sells for 50% above list price (listed at $70,000, sold over $110,000).

Even Canada is getting into the act: A bidding war in Vancouver drove one home up to $1.1 million — almost $300,000 above its asking price.

Talk to most real estate professionals and it’s the same story: Cash-flush investors and first-time home buyers armed with a federal tax credit, low interest rates, and 3% down-payment loans courtesy of the Federal Housing Administration are bidding up properties with reckless abandon.

So it’s settled then — we’re at the bottom, right?

Unfortunately, probably not.

Before we get too excited about these bidding wars indicating a bottom for the broad housing market, it’s important to consider that these situations are heavily concentrated in areas where home prices are low. The trend is far from prevalent in mid-tier and high-end markets.

Lower priced homes are typically easier for investors to flip into juicy returns and require a smaller cash outlay, which opens the playing field to those without deep pockets. Further, cheap homes attract first-time buyers, who can be more easily swayed into bidding above list by commission-hungry Realtors.

In addition, big banks like Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM), and Citigroup (C) are still holding back the majority of their foreclosure inventory from the market. This is partly due to the “soft moratoria” ordered by the White House along with banks being reticent to take big losses on homes that have tumbled in value. This is keeping supply low, frustrating would-be buyers into bidding aggressively with so little inventory to choose from.

Meanwhile, as readers of this column should know all too well, higher-end markets continue to struggle, as jumbo mortgages remain a chore to qualify for and down-payment money is nigh impossible to scrounge together for all but the most qualified buyers.

This dichotomy in the marketplace means now more than ever, anyone considering buying a home should live by the over-used adage that real estate is always local. Markets adjacent to one another, separated by nothing more than a school district line, could be headed in opposite directions — and it may be that the “good” area is far riskier than the “bad” one.

This post first appeared on Minyanville.

After four years of searing pain, the US housing market is finally showing signs of life. And even as the causes and relative sustainability of this nascent “recovery” are being hotly debated, traditional buyers and investors alike are jumping into the market for homes with both feet.

It now appears that the biggest, baddest investor of them all, the one with infinitely deep pockets, is wading into the fray: Uncle Sam.

According to HousingWire, the US Department of Housing and Urban Development, or HUD, is giving state and local governments a total of $50 million to help deal with the onslaught of foreclosed homes, many of which lie vacant and blighted, ripe for vandalism, squatting, or worse. HUD has allocated chunks of cash to national development groups and local community organizations hoping to plug holes left by the private real estate investment market.

Funds are being distributed through the Neighborhood Stabilization Program which was established by former President George Bush in Economic Stimulus part one, which was then expanded by President Barack Obama earlier this year.

This investment directly into the real estate market highlights a new strategy in Washington’s fight against foreclosures, and one which is likely to grow in the coming years. That the federal government will increasingly be forced to take ownership — directly or indirectly through local organizations — is the subject of a recent piece I wrote on land banking for HousingWire, a mortgage and housing trade publication.

Land banks are publicly funded entities charged with taking ownership, rehabilitating, and putting back into use vacant or otherwise unwanted properties. The most well-known land bank in the country is run by Genesee County in Michigan, which is home to the woe begotten town of Flint.

Flint’s land banking initiatives began decades ago, as foreclosures and blight are not some new, post-housing bubble phenomenon. The program has gone a long way in providing Flint the chance at a future many of its Rust Belt neighbors can only dream of.

While as a loyal capitalist I loathe government meddling into the affairs of the private markets, to cry foul at bureaucrats for meddling in the housing market would redefine the old cliché of closing the barn door after the horses have left the barn. If taxpayer money is going to be heaped at our country’s ongoing housing nightmare, far better for it to go to community redevelopment than to the reckless inflation of the balance sheets, earnings, and salaries of the likes of JP Morgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C).

Initiatives like the recent allocation of money from HUD down to the local level do not represent some silver bullet to fix our housing woes, but seek to address some of the harsh realities of what, for most, is a foreclosure epidemic that plays itself out on CNBC and flashy websites like RealtyTrac or Foreclosure Radar: It just doesn’t seem real.

But drive through Oakland, California, Cape Coral, Florida, or Detroit and foreclosures aren’t just another statistic that evidences our dire economic situation. Foreclosures destroy neighborhoods, rip apart families, and set back years of what were otherwise positive improvements in some of the country’s most impoverished communities.

Real estate investors are reticent to put money to work in many of these areas because the risks simply don’t justify the rewards. Banks ignore many of these homes, abandoning the fight against looters and squatters, leaving the problems up to local police who are then dragged away from their regular beats. This isn’t a situation that benefits anyone.

It is, however, one of the uses for taxpayer money that can be reasonably justified. The list of government programs about which that cannot be said is far, far too long to list — and growing.

$50 million doesn’t even approach a drop in the bucket compared to what has already been spent bailing out AIG (AIG), Fannie Mae (FNM), Freddie Mac (FRE), General Motors (GM), Chrysler, Bank of America, Citigroup, and countless other, smaller firms that only now exist because taxpayers ponied up our hard-earned cash, whether we wanted to or not.

This $50 million is only the beginning. Lurking beneath the headlines of what many believe to be a respite from the Great Recession are neighborhoods with no hope of a recovery. The land banks, indeed, cometh.

This article first appeared on Minyanville.

The only question that really matters in the housing market right now is the following: Does the recent strengthening in sales data signal an imminent bottom, or are we smack in the middle of a dead-cat bounce?

The answer, of course, is complicated. And as I’ve discussed in the past, the concept of a “bottom” in the housing market is meaningless, as stabilization and eventual recovery will happen on a localized, market-by-market basis.

Nevertheless, there are some key factors to watch that will provide clues as to how long this rally’s legs really are, and what could trigger a reversion in the miserable state of the market we’ve become accustomed to over the past 4 years. Here are, in my mind, the top 3 “tells” to watch when it comes to the direction of the housing over the next 6-12 months:

1. Jobs

In the words of HousingWire’s Paul Jackson, “If housing is central to recovery, and jobs are central to housing, and jobs aren’t doing very well — what’s the real forecast for housing?”

Despite jobs data that appears to have stopped getting worse, the employment outlook in the US remains dismal. Government-backed loans through the Federal Housing Administration (FHA), Fannie Mae (FNM), and Freddie Mac (FRE) dominate the mortgage market right now, all of which have strict requirements for job stability. This means that even if companies start hiring again, recently laid-off workers will still have a hard time qualifying for a mortgage.

Furthermore, even though layoffs have slowed, the majority of firings that occurred in the past year haven’t yet resulted in mortgage delinquency. As struggling homeowners gradually succumb to the pressures of losing a job, default and eventual foreclosure can occur many months after the layoff itself. We’re yet to see any material improvement in default data, especially in high end markets.

2. The FHA

The FHA offers taxpayer-backed insurance for mortgages that are underwritten to their specific guidelines. Originally intended to provide home loans for low-income borrowers by requiring minimal down payments and overlooking blemished credit records, by the end of 2008, FHA loans accounted for almost 40% of all new loans — up from less than 5% at the beginning of 2007, according to data compiled by Lender Processing Services (LPS).

In distressed markets, where ongoing foreclosure moratoria are keeping bank-owned homes off the market to artificially limit supply, FHA borrowers make up the vast majority of buyers. This has helped the likes of Wells Fargo (WFC), Bank of America (BAC), and Citigroup (C) unload foreclosures at higher prices, but it has prolonged the eventual recovery as banks slowly bleed out distressed homes into the market.

To help alleviate the housing crisis, Washington upped FHA limits so that in some areas, buyers can get an FHA loan for as much as $719,000. This widening of FHA’s lending criteria has helped buoy many mid-tier markets, as borrowers can now buy $500,000 or $600,000 homes with a paltry 3% down. (Just ask Toll Brothers (TOL) if the FHA helped boost sales in the past 6 months.)

If the FHA tightens its guidelines or lowers its loan limits, look out below, as a huge source of liquidity for the housing market will evaporate.

3. November 30, 2009

This November, the $8,000 first-time homebuyer tax credit expires. If I were a betting man (which I’m not), I’d wager if the market stumbles even slightly between now and the end of the year, a new tax credit will be issued in some form. (They may extend it regardless of how the market performs.) Even if the credit is extended, many first-time homebuyers are already scrambling to make purchases while they can still get a check from Uncle Sam.

To wit, check out the advertisement currently running on ZipRealty, a popular online real estate brokerage:

Circle November 30 with a big red pen, because first-time buyers now account for fully one-third of purchase transactions according to the National Association of Realtors. If this demand dries up, sales could resume their downward spiral.

The bottom line is this: The outlook for housing is murky, at best.

Low-end markets are benefiting from government support on both the supply side (foreclosure moratoria) and demand side (tax credits, FHA) of the equation. Meanwhile, high-end markets — as defaults on prime mortgages keep rising and the job market remains lousy — are seeing steep home-price declines.

Anyone touting housing’s so-called “bottom” is likely trying to sell you something — namely, a house.

This post first appeared on Minyanville.

It only took 18 months, but the fact that the US luxury real estate market is falling apart at the seams is finally starting to sink in.

Yesterday’s Wall Street Journal chronicled the plight of high-end housing markets, as formerly wealthy homeowners are falling behind on their mortgages at an astounding rate. Defaults and foreclosures are increasing in the Jumbo Prime mortgage space — big loans made to borrowers who were supposed to be good credits — at a faster clip than in any other segment of the market. This is causing distressed or otherwise forced sales, resulting in the type of Price Discovery that can send vulnerable markets reeling.

Meanwhile, cheaper markets have, by and large, experienced the worst of this vicious whoosh down and are now groping for a bottom. Some of these distressed areas — the fortunate few that were allowed to experience a legitimate correction before government-sponsored foreclosure moratorium set a true stabilization back months, if not years — have laid the groundwork for a long, arduous recovery. Others, prevented from finding a bottom on their own, will be suffering from a years-long slow bleed of inventory, crushing the hopes of local real estate investors and first-time buyers and sending capital elsewhere.

As Wells Fargo (WFC), Bank of America (BAC), Citigroup (C), and JPMorgan (JPM) — the biggest holders of property in the country — continue to bow to White House demands to keep housing inventory off the market, a legitimate sustainable recovery in housing will remain elusive. This matters little for high-end markets, however, as prices are screaming downward whether the government likes it or not.

What few media outlets are covering is how the upwards spreading of the housing infection will affect widely reported home-price data, and thus the psyche of the American home buyer. This is a subject I mentioned back in April, but now that the trend is becoming reality — as the Case Shiller Home Price Index registered its first monthly increase since 2006 — it warrants revisiting.

As defaults and foreclosures bleed into the high end of the market, buyers gain the upper hand in price negotiations as sellers become desperate. These forced sales will turn illiquid markets liquid as buyers that have been locked out of these expensive markets begin to scour the landscape for opportunities. As sale volumes pick up, so too will the average price of the homes eventually sold, since this will shift the distribution of transactions included in the broad averages towards more expensive homes.

This isn’t just some statistical anomaly: As broad measures of housing data show recovery, behind the curtain, individual submarkets will be telling a vastly different story. To be sure, the Jumbo market makes up less than 3% of the total housing market, but if it’s your market, that makes it 100% of the housing market that matters.

This post first appeared on Minyanville.

It took the Wall Street Journal an entire survey to prove what readers of this column have known for months: The housing recovery, as it plays out, will be a localized event, varying greatly city to city, neighborhood to neighborhood, street to street.

The Journal, god bless them, compiled housing data to compare inventory changes, months supply, price drops, unemployment, and default rates across 28 US metro areas. Unsurprisingly, bubble markets like Las Vegas, Phoenix, and Miami look particularly horrid, whereas areas like Dallas (which avoided much of the housing mania) and cities like Charlotte and Seattle (which are just now seeing price declines accelerate) appear to be holding up rather nicely.

But drilling deeper into the raw data reveals a housing market that’s deeply bifurcated, even within individual cities.

As low-end markets experience a sharp increase in buying activity due to supply shortages and vastly lower prices, illiquid high end markets are experiencing violent price swings — typically in the southward direction. This much is already known, and the Journal’s study simply shows what we’re told ad nauseam: Real estate is, in fact, local.

What’s far more applicable to home buyers and sellers around the country, however, isn’t what a few broad (yet important) data points show about what’s happening in a few hundred neighborhoods all lumped together. Instead, it’s where individual submarkets are headed. After all, owning a home is an investment in a neighborhood, a street, a community — not necessarily a metropolitan area at large.

Housing prices, by extension — when measured as broadly as a metro area — are basically meaningless.

Real estate, for all its intricacies, isn’t any different than any other market: Prices are set by the interplay between supply and demand. The trick, then, is isolating the key data points within an individual micro-market that tell us who has the upper hand — buyers (demand) or sellers (supply). This is the best short-term indicator of where prices are likely going in the near term.

Unfortunately — and one of the reasons bottom-calling in the current housing cycle is so dangerous — myriad behind-the-scenes deals between regulators and big banks like Citigroup (C), Wells Fargo (WFC), Bank of America (BAC), and JPMorgan Chase (JPM) are impacting markets in a material way.

There are a number of important measures of housing supply and demand. And because at Cirios Real Estate we take a bottom up approach to evaluating property values (i.e., house by house, rather than city by city), we pay close attention to the sales-price to list-price ratio.

This ratio simply measures the difference between where a home was listed and where it was sold. To be sure, this can get complicated in markets where price reductions are common. But comparing both original list price and most recent list price to the eventual sales price can yield important insights into a market’s true behavior.

As can be seen in the graph below, which measures this ratio in 2 towns in the San Francisco Bay Area, this ratio tends to follow housing booms and busts fairly closely.

All things being equal, as sellers gain the upper hand and buyers become more desperate, prices are bid up over list and this ratio will rise. On the flip side, as demand weakens and sellers scramble to unload their homes, price reductions and low-ball offers drive sales.

In markets with rising sales-price to list-price ratios that have been under pressure for months, if not years — like many distressed markets — we’d argue stabilization could be just around the corner. The big caveat, however, is that banks keep bleeding out their shadow inventory slowly, and don’t dump their massive bank-owned home portfolios onto the market. Keep in mind, also, that stabilization doesn’t imply appreciation.

High-end markets, on the other hand, are seeing massive list-price drops, and any sort of bottom is indeed very far away as forced sales and foreclosures creep into well-to-do communities.

In today’s market, this analysis further must be broken down between homes that are in move-in ready condition and those in need of rehab. The former, financeable by the various government-backed loan programs, is generally in short supply and high demand. The latter, which must be purchased with cash, appeal to a smaller world of buyers looking to turn a quick profit.

We find that in many areas, turn-key updated homes that pass muster with the FHA, along with Fannie Mae (FNM) and Freddie Mac (FRE), have a far higher sales-price to list-price ratio than do homes bought with cash (i.e., fixer-uppers).

This makes intuitive sense, since even if government-backed loan programs could be used to buy these rehab projects, few prospective homeowners in the current environment have the cash on hand for a down payment as well as a remodel project. Moving in with as little out-of-pocket expense as possible is of the utmost importance.

Taken together, often times the sales-price to list-price ratio in a given town or zip code hovers close to 100%. But dividing sales into “financeable” and “non-financeable” yields a far different result. In most cases, sellers of updated turn-key homes currently have a distinct upper hand over buyers, while buyers of fixer-uppers can still get low-ball bids accepted. Of course, there’s still the world of homes that are wildly over-priced — but those aren’t selling anyway.

There are many other ways to look at supply-demand fundamentals in local real estate markets. But if you don’t divide analysis between homes that can be financed through the FHA, Fannie, or Freddie and those that can’t, you may as well be comparing bombed out duplexes in Oakland to luxury condos in Manhattan.

Wait, never mind, bad example — those 2 markets share one unique characteristic: No one is buying.

This post first appeared on Minyanville.

Where have all the flowers gone, long time passing?
Where have all the flowers gone, long time ago?
When will they ever learn, when will they ever learn?
- Peter Seeger

There’s an odd refrain cropping up in some of the nation’s most troubled housing markets — those where real estate professionals can’t help but raise their pom-poms in unison and declare this “the best buying opportunity, maybe ever.”

Here’s how it goes: Where have all the houses gone?

For months, buyers have been told the time to buy is now, what with interest rates at all-time lows, prices down in some markets more than 50%, and generous tax credits for first-time home buyers. These factors — along with aggressive advertising by the National Association of Realtors — have driven up demand, even as prices kept falling. Supply, meanwhile, has been severely limited for the past 6 months by foreclosure moratoria that were enacted at the end of 2008.

And as tends to happen when demand outweighs supply, many homes have been selling above their list prices as multiple-offer scenarios led agents around the country to wax lyrical of the boom days of yesteryear.

This cursory analysis of the nation’s housing market — while sufficient for the financial punditry complex, eager to call a bottom (again) and certain real-estate agents looking to make a quick sale — is woefully inadequate for any buyer interested in buying an actual home rather than a data point.

Take these 2 California markets for example — a pair that couldn’t be more different if one were located on the moon:

Bakersfield, a central-valley farming and oil town best known for jockeying with Fresno for the right to be called “the armpit of California,” was besieged by the housing-market crash early on.

Subprime lending flourished here during the boom as home builders like Lennar (LEN), Centex (CTX), and DR Horton (DHI) showered once-quaint communities with sprawling suburban developments. The town made national press for one of the worst real-estate markets in the country — prices have fallen an astounding 48% since just last year.

In Bakersfield, the above characterization of the housing market isn’t altogether inaccurate. Prices have fallen far and fast, and homes bought by all-cash investors can offer a tidy return as rentals. Three-bedroom homes for $40,000 will do that to a market. And with inventory constricted by foreclosure moratoria, properly priced homes don’t stay on the market for long.

Indeed, supply of unsold homes sits at a mere 2.6 months, according to a local appraiser group — a far cry from the nationwide level of around 10 months. That’s not to say, however, that imminent appreciation is on the horizon: A flood of foreclosures looms, threatening to further depress prices.

Kissed by a gentle sea breeze and the Midas Touch, Laguna Beach, California is a seaside town 164 miles to the southwest and best known for hidden surf breaks and snobby adolescents.

The setting for the once-popular TV show The OC, Laguna was also the locale-du-jour for mortgage brokers and real-estate agents who struck it rich during the boom. Nearby Irvine — once the mortgage-banking capital of the world — made Laguna’s palatial cliff-side homes ideal for brokers eager to solidify themselves in the Orange County mortgage scene.

Prices rose to absurd levels for what were, to be sure, beautiful homes in a pristine location.

Laguna is now crashing back to earth.

Supply of homes above $1 million now stands at an astounding 24 months, as just 49 have sold this year with a whopping 313 currently on the market. List prices are gapping down as buyers struggle to find jumbo loans. Big banks like JPMorgan (JPM), Citigroup (C), and Bank of America (BAC) won’t touch the stuff, since they can’t unload them onto Fannie Mae (FNM) and Freddie Mac (FRE). So desperate sellers are being forced to get creative with their marketing.

One recent sale included a 350 Ferrari Modena, and a short sale less than a mile away is being offered for $8,995,000 — nearly $3 million below its original list price of $11,990,000.

These 2 wildly divergent markets are a microcosm of the country’s current real-estate dilemma: While low-end markets grope for a bottom (hoping the aptly described “pig in the python” of shadow supply doesn’t derail their nascent recoveries), high-end markets careen back to earth.

And as price discovery works its way through well-to-do areas, the mix of homes sold will continue to shift back towards more expensive sales, pushing up median and average-sales-price data. This dynamic will present the misleading conclusion that the country’s housing market is recovering, even as actual prices continue to fall.

Indeed, as many frustrated buyers wonder where all the houses have gone, most would be wise to sit tight for a few months until banks get around to unleashing a mountain of supply back onto the market — they’ll soon find out.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Just when you thought it was safe to go back in the water… Subprime lending has come roaring back.

But this time, reckless financial innovation isn’t being hatched on Wall Street. Instead, state governments are angling to “monetize” first-time homebuyer tax credits so borrowers can purchase homes with little or no money down.

If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should.

The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent.

Critics, however, argue that rebates don’t end up in a buyer’s pockets until his or her 2009 tax returns are filed - even though rebates are credits, not just deductions.

Homebuilders like Pulte Home (PHM), Lennar (LEN) and KB Home (KBH), along with their lobbying arm, the National Association of Homebuilders, have thrown their full weight behind the rebate program, but say it still doesn’t go far enough.

In an effort to boost home buying — even for marginally qualified borrowers — a number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys, rather than having to wait for next year’s refund check. This allows buyers to pay for things like closing costs, mortgage points - or even the down payment.

States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn’t make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious - usually just a bit over the prime lending rate.

Missouri was the first state to launch such a program, and has since been joined by Delaware, New Mexico, Pennsylvania, Tennessee and others. States are even lobbying the IRS to deposit the refunds directly to the states, rather than to the home buyers, in order to circumvent non-payment. The IRS, for its part, “is reviewing” this idea.

In Washington, the state Housing Finance Commission runs a tax credit bridge-loan program, which it hopes will grow in the coming months. Not surprisingly, local real-estate professionals are behind the initiative. Washington Association of Realtors president Bill Riley told the San Francisco Chronicle he believes around half of would-be first-time buyers in his state “cannot save enough money for the down payment and closing costs.”

Exactly. That’s the point. This is precisely what differentiates a “would-be” home buyer and a home buyer. And that’s the way it should be.

If the federal government wants to subsidize home ownership, fine. It’s already proven unwilling to learn the lessons of Fannie Mae (FNM) and Freddie Mac (FRE) about the costs of jamming borrowers into homes they can’t afford. But these rebates should at least be limited to borrowers that meet even the most modest requirements to buy a home in a responsible manner.

The Federal Housing Administration — another vehicle for government-backed mortgages where taxpayers bear all the risk — gives out loans that require borrowers to post a meager 3% down payment. If a “would-be” homeowner cannot scrape together this amount of cash, that person should rent and save their pennies. They should not receive a no-interest loan from the state government. This is not discrimination, this is not redlining, its common sense.

In a rush to prop up home prices and delay the ultimate day of reckoning for the vast majority of US real-estate markets, the federal government — and now state governments as well — insist on coercing taxpayers to over-leverage themselves and take on a debt burden they cannot truly afford.

From the looks of it, Washington is leading by example.

By ANDREW JEFFERY

This post first appeared on Minyanville.

As a growing number of economists, pundits and real-estate professionals assure us the housing market’s worst days are over, prospective home buyers need a trusted advocate to make sure they don’t end up on the wrong side of someone else’s trade.

More often than not, that person will come in the form of a real-estate professional working on the buyer’s behalf and earning a commission for their trouble. Below are 5 simple questions you can ask to gauge whether a given candidate is looking out for your best interests - or his or her own.

But first, a word on terminology.

The terms “agent,” “broker” and “realtor” are often thrown around interchangeably. This isn’t exactly right. While laws differ from state to state, acquiring a broker’s license typically requires a series of courses on real estate practices, principals, finance, law, appraisal and the escrow process. A broker can use his license to form a brokerage, and the company can then perform services as a licensed entity.

In many states (like California) a licensed broker can not only conduct real estate transactions, but earn commissions for arranging mortgages and other types of real estate-related loans. For this reason, a brokers license offers the holder huge potential earnings power.

An agent is a step below a broker. While requiring a license, an agent is normally treated as an employee of the broker and thus the broker is responsible for the actions of the agents under his charge. If an agent screws up, his reputation (and license) as well as his broker’s is on the line. Agents can typically conduct the same transactions as a broker, but must do so under the supervision of their boss.

Finally, the term “Realtor” is used to specifically identify a real estate broker or agent who is a member of the National Association of Realtors, or NAR. The NAR is a nationwide trade group that collects member dues, lobbies in Washington and runs marketing campaigns urging Americans to buy homes. The NAR is conspicuous in its role as national housing cheerleader, as it’s chief economist Lawrence Yun has been predicting an imminent bottom in prices since early 2006.

1. Is it a good time to buy?

Of any question a buyer is likely to ask his broker (or agent), this may be the first. And the most important. The answer itself isn’t nearly as important as how the broker responds.

Any broker that says definitely that yes, this is a great time to buy, should be eyed with skepticism. Without knowing a buyer’s specific circumstances, understanding localized market trends and the underlying value of a specific home, saying it is a great time to buy is a sales pitch, pure and simple.

Brokers will often cite low interest rates, high levels of affordability, low replacement costs and home prices that have fallen precipitously from their peaks as reasons its never been a better time to buy. But ask yourself, all those conditions were true six months ago — was it a great time to buy then?

The proper response to this question from a responsible broker is to answer the question with a question, or questions. How much money have you saved? How long do you plan on owning the home? How much money do you make? How much is your other debt service? What are your contingencies if you lose your job? How is your credit? What are your other motivations for wanting to buy?

Only armed with answers to these and other questions can a broker — or a buyer for that matter — determine whether its the right time to buy.

2. Are home prices near a bottom?

As with the previous question, the answer should be in the form of a question. Where and when are you looking to buy? Do you want a move in ready home or one that needs some work?

While there is no crystal ball as to the direction of home prices in the near or long term, a broker should have a clear understanding of the dynamics effecting his or her local market. I hear ad nauseum here in California that home prices are stabilizing because demand is up, prices are down and homes are receiving multiple bids. But those are external symptoms of market machinations underneath the surface.

Foreclosure moratoriums put in place late last year limited the number of bank owned homes dumped onto the market. This constricted supply, and coupled with tax incentives, low interest rates and aggressive marketing from the NAR, led to a situation where in some areas, for some homes, demand outweighs supply. But that doesn’t mean the situation will persist — in fact, the smart money is betting it won’t.

This dynamic is far from ubiquitous, as most high end markets remain illiquid with prices tumbling into an apparent vacuum.

Real estate is, and will always remain, local.

3. How do you determine which homes to show me?

Not to beat a dead horse, but this question should be met with yet another series of questions. What size home are you looking for? Are schools important to you? How close do you want to be to public transportation? Do you care about being within walking distance to shops and restaurants? What style of home do you like? Do you want a yard?

A good real estate broker should be a blank slate, absorbing your preferences, desires and reasons for buying without injecting his own bias. Just because your agent loves a certain home and thinks its a great buy, doesn’t mean it fits your criteria. Don’t be afraid to tell your broker that you don’t like a particular home.

Brokers should show you a variety of homes, below, within and above your price range, to give you a sense of what is out there on the market. With prices still coming down in most areas, you may walk inside your dream house and decide its worth it to keep renting — and saving — for another year until prices fall to something you can afford.

Until you feel comfortable your broker is showing you everything that may fit your criteria, perform your own searches on the myriad free websites out there. Redfin.com is a great resource for the metropolitan areas it covers, while Trulia.com, ziprealty.com and even Realtor.com have excellent free search features.

4. What are my financing options? How much can I afford?

While real-estate brokers are often legally allowed to arrange loans, more often than not its a dicey legal proposition for the broker to sell you a house as well as a mortgage.

Nevertheless, brokers should be well-versed in available financing, rates, qualification requirements and whether sellers require a mortgage pre-approval letter to accompany any offer (these days, most do). If your broker doesn’t know the answer to a certain question, that’s OK as the rules change almost daily, but he should actively pursue the answer and report his findings back without too much delay.

Shopping around for the best loan terms can be a time consuming and confusing process, but it must be done. Gone are the days where Wells Fargo (WFC) always gave you the best rate, or your buddy down at Chase (JPM) could get you a great deal. Keep in mind most loans these days are originated to Fannie Mae (FNM) and Freddie Mac (FRE) guidelines, which means most big lenders offer similar loan programs.

All things being equal, choose a lender you feel you can trust (not just the one offering you the best deal) and always have a backup.

Lastly, never trust a broker to “tell” you how much you can afford. This decision, especially in an environment where home prices are likely to fall for the foreseeable future, should be one each buyer must make for himself.

Plans change, life doesn’t always follow the path you hope it does. Being conservative in what you can afford, leaving a cushion and planning for the unexpected are paramount in today’s uncertain market conditions.

5. Provide me with examples of a few closings you are the most proud of over the past year.

This question gives your broker a bit of an opening to sell himself, and will go along way towards helping figure out whose side he is actually on. If your broker launches into a a story about this cute young couple he helped get into the house of their dreams, move along, cute young couples rarely make savvy home buying decisions and are easy prey for aggressive brokers. Also pass if you hear things like, “I found this great house right when it came on the market, we jumped at it and got in before the other buyers had a chance to bid.”

Sellers, by and large, are still unrealistic about how much they can sell their homes for. This means that when houses come out onto the market, the asking price is nearly always above where it will actually go for. Be patient, make your broker work for his money.

Although there are situations where multiple bids will come in from prospective buyers, chances are this isn’t a house you want to buy. Most of this sort of activity is going on in areas with high levels of foreclosures. Now that the moratoria are lifted, banks will start flooding the market again come next month. All that great news about limited supply will become ancient history as prices plunge once again. The house itself may be great, but just because homes are “cheap,” doesn’t mean they won’t get cheaper.

A good response is one where a broker tells you a story of a buyer he worked with for months, go to know a few neighborhoods that fit all the pertinent criteria, and waited for the right house to come on the market. Many sellers will list their house at a “hopeful” price for the first 30 or 45 days, then drop it down to something more reasonable. Rarely will a house sold in the first couple weeks be a “steal” for the buyer.

Your broker should stress that patience, research and shrewd negotiating got his client a great home at a great price.

To be sure, there are other questions to ask of a prospective broker, but this is a good start. Finding a broker should be treated like a job interview, after all, even though the commission may not be coming out of your pocket, you, as the buyer, end up paying one way or another. Make sure your broker is worth his salt.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Residential real estate is about to get very weird.

In the coming months, housing-market data is likely to show price stabilization in many of the country’s hardest hit areas. Pundits, government officials and real-estate professionals will loudly proclaim the worst of our real estate woes are behind us. Back in reality, however, this data will simply reinforce the axiom that there are lies, damn lies, and statistics.

The lion share of home price declines have, thus far, been focused in low-end markets -areas where property values became the most detached from housing-market fundamentals. Even though the high end is now declining, sales activity is still heavily concentrated in the country’s most distressed markets.

Taking a look at the data below compiled by my firm, Cirios Real Estate — which depict sales transactions for the part of the San Francisco Bay Area between San Francisco and San Jose known as the Peninsula — one can see how rising home prices from 2003 to 2007 shifted sales transactions towards more expensive properties. This makes intuitive sense, and should naturally push up both average and median home prices.

Click to enlarge

Since the market peaked, however, notice how the percentage of sales of homes under $400,000 shot up to more than 50% of sales in the first quarter of this year, from as low as 9% in 2007.

Conversely, sales over $1,000,000 that accounted for almost a quarter of transactions in 2007 now make up less than 9% of total sales so far in 2009.

This heavy concentration of sales in low-end markets is skewing home price data to the downside, exaggerating the impact of depressed markets on broad measures of prices.

As the foreclosure epidemic spreads outwards to more well-to-do areas, and job losses force previously stable homeowners to sell into a weak high-end market, more expensive homes will begin to make up a greater percentage of total transactions. This dynamic — not an overall rise in property values — is likely to push up average and median home price measures.

In other words, high-end markets will be falling as price discovery rears its ugly head, while low-end markets are flat at best, as price declines reach exhaustion levels and investors step in to buy. High levels of supply and looming shadow inventory of foreclosures will prevent meaningful appreciation in these distressed areas for the foreseeable future.

Meanwhile, data will show a housing market on the rebound.

No doubt, banks like Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) will cheer the end of the real-estate slump. Real estate professionals will pound the table that now’s the time to buy (just like they said back in 2007). Government officials will proudly assert their mortgage-relief efforts were a success.

Nothing, however, could be further from the truth.