Mortgage Q&A: Optimism tempered by experience

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The National Association of Realtors (NAR) has reported that existing-home sales nationally increased 4.3 percent in January from the previous month. The new annualized rate increased to 4.57 million. (According to the NAR, the annual rate for any month represents what the total number of sales for a year would be if the pace for that month were maintained for 12 consecutive months.)

On the surface, this appears to be good news. A 4.3 percent increase in one month seems like a lot, but when we dig deeper, the news may not be so good. That’s because the NAR initially reported December sales at an annualized 4.61 million but revised the number down to a disappointing 4.38 million.

On the flip side, the NAR reported that 2.31 million homes were up for sale at the end of January. At the current sales pace, this amounts to about six months of inventory. While this seems like, and probably is, a long time, 12 months of inventory was on the market just a short time ago.

Economists may not be as optimistic as the NAR. Many contend the data is skewed, not unlike the misleading unemployment rate. The actual rate of unemployment is higher than the reported numbers because the rate does not include those who are unemployed but have given up looking for a job.

Similarly, many homeowners would love to sell their homes but are refraining from putting them on the market until indications of a recovery are stronger. When a clear recovery is in sight, it could be hindered by a flood of homes going on the market, increasing supply and putting pressure on prices.

The overly stringent lending underwriting guidelines also are affecting sales. While I was never a fan of subprime lending, the stricter approval guidelines are killing deals now that, if a little common sense was inserted, wouldn’t be killed.

The Home Value Code of Conduct (HVCC) rules implemented a couple of years ago have not helped matters. Designed to prevent commission-based loan originators from unduly influencing an appraiser, a byproduct of HVCC has been appraisal valuations that are all over the map.

I recently did a refinance for a friend whose appraisal came in at $475,000, far higher than I had expected. A month later, a neighbor of his, who owns a similar but superior home, contracted to sell his home for $430,000, a reasonable (if not low) price, in my opinion. Unfortunately, the deal was terminated because his appraiser valued the property at just $422,000. This is less than 2 percent under the contract price but an $8,000 decrease - a small percentage, but a lot of money.

I can’t understand why the appraiser wouldn’t consider the notion that the best determination of value is what an independent third party is prepared to pay.

Myriad issues persist in residential real estate and lending. I’m afraid it’s going to take some time to untangle this giant ball of fishing line. Meanwhile, qualified homebuyers and current homeowners are enjoying very cheap money by financing their homes with remarkably low rates.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.

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