MarketWatch, part of The Wall Street Journal Digital Network, released its annual rankings of the best cities in the U.S. for business this week. Out of 102 major metro areas covered, guess which city climbed from No. 31 in 2009 to No. 10 in 2010?
MarketWatch uses a variety of measures to break down data into two categories: “Company Score,” the concentration of businesses within a metro area, and “Economic Score,” which takes into account unemployment, job growth, population growth, personal income and local gross domestic product. More metric categories were used in this year’s rankings, in part to better reflect tourism business and the economic impact of military bases.
Based on these calculations, Seattle’s No. 10 ranking had a total score of 932, with a Company Score of 501 and an Economic Score of 431. Ranked No. 1 is Washington, D.C., then Omaha; Boston; Des Moines, Iowa; Minneapolis; Denver; Richmond, Va.; New York City and Harrisburg, Pa. Other West Coast city rankings include San Francisco at 33, Portland at 52 and Los Angeles at 61. At the No. 102 position? Fresno.
What made the difference this year? Employment. Whereas Seattle’s sad showing in 2009 was due to poor statistics in job creation, its jobless rate dropped by a third of a percentage point to 8.7 percent in September 2010. MarketWatch also notes that Seattle did well in jobless comparisons between 2006 and 2010, and in keeping the percentages down over that period. It also hits the upper ranks in creating jobs relative to its population.
However, MarketWatch noted that Seattle is lacking in the number of major private companies. No businesses from Forbes Private Companies’ list reside in Seattle, and we are the largest U.S. city without one. But while the Seattle area may be amiss in that sector, it is home to a diverse selection of large S&P corporations such as amazon.com, Boeing, Costco, Microsoft, Nordstrom and Starbucks. Plum Creek, the largest publicly-held timber REIT in the country, is based in Seattle. And last week, The Fred Hutchinson Cancer Research Center announced its purchase of the 1100 Eastlake building, expanding its South Lake Union footprint to 15.2 acres.
Add a Pacific Rim gateway, the natural beauty of the Puget Sound area, plus a diverse culture, and we’re confident that Seattle will continue to remain high in “Best” rankings for years to come.(Photo by Marmaduke Percy, Wikimedia Commons)
Almost all newspapers across the country referenced increases in home sales on the front page over the last few days. However, all stories have been careful to recognize if the market has in fact hit bottom or not.
The Multiple Listing Service reports the first quarter of 2009 to have 52 sales. The first quarter of 2010 reports 103. Loan applications have also been reported to be on the rise in addition to a slight increase in the median price of homes in King County. Most of the activity is of course hypothesized to come from expected increases in interest rates, and the expiration of the homebuyer tax credit.
King County house prices post year-over-year rise for first time in 2 years (article):
Tim Ellis, who edits the real-estate blog Seattlebubble.com, said in an e-mail that he expects Seattle-area sales to continue to rise through May, then plateau and maybe drop in the summer and autumn after the tax credits expire.
We’re of course optimistic in that housing sales will continue, and agree with Tim that prices will continue to be flat.
As predicted (Interest Rates of 5% May Never Be Seen Again! Here’s Why.), the Federal Open Market Committee (FOMC) has confirmed that the program created to help repair economic recovery through the purchase of mortgage-backed securities will expire on March 31st. Intentionally designed to drive down rates, current economic conditions have improved enough to where the need for such low rates is “no longer warranted.”
This has brought up an industry-wide push to all those who have been on the sidelines waiting for bottom to take advantage before rates inevitably go up. However, rates are not expected to skyrocket. Assistant Secretary of the Treasury Michael Barr, was quoted in the Washington Post as saying, “I’m not going to say there will be no effect on rates, but it should be an orderly transition.”
Expectations are that once rates begin to rise, we’ll see more market activity from hesitant buyers. There are still a small number of buyers who believe it is possible for home prices and economic conditions to go even lower. Therefore, with only the option to either buy or continue hestitating, rising rates could be the evidence that the market needs.
Here are some highlights from the press release issued by the FOMC:
- Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth and tight credit.
- Business spending on equipment and software appears to be picking up, but structure investment is still contracting and employers remain reluctant to add to payrolls.
- Firms have brought inventory stocks into better alignment with sales.
- With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.
Here’s an interesting bonus read: Higher Mortgage Rates Mean More Buyers
Interest rates are speculated to begin heading in the opposite direction come springtime. As part of the economic plan to stimulate the market, the Federal Reserve has been purchasing mortgage-backed securities in order to manipulate demand. Since early 2009, the Feds have bought an approximate $1.25 trillion in securities, and Fed spending is set to expire on March 31st. Unlike the Tax Credit extension real estate professionals crossed their fingers for, the Feds have already slowed down on spending, suggesting they will in fact cease securities purchasing. This should result in opening the market to investors demanding higher rates due to higher perceived risk. With that being the case, it’s likely that rates will never be seen at 5% again.
Lenders (preferred) are advising people to take advantage of these low rates before spring when they are expected to begin climbing to an estimated 5.5%. Spring is also the busiest season of the year for buying real estate, so getting in on a low rate and low price is certainly a wise idea. Rates should continue to rise at a fairly slow rate after that, then cap around 5.75%.
We’re a little late posting on this topic which seems to have been beat in the head since everyone caught wind of it, but we’re not sure that this “bad news” is really all that bad at all. It might also be fair to say that it’s not all that interesting either. We’d rather spend the time available to post an update on ENSO (coming soon). But, there were some questions we bounced back and forth between a couple of the lenders we regularly refer business to (btw, a good reliable lender can sometimes be like a pint of your favorite ice cream) and we had to get our facts straight.
If you have yet to be filled in, the government backed loan program (FHA), has become a resourceful option for first-time buyers, but the program is moving towards congressional tightening on standards with FHA applicants during an economic upswing–or even better known as a plateau. There’s certainly no doubt that the peak of the market during 2006/07 won’t be coming back anytime soon, but why ruin the party when people are finally starting to show up?
In a quick pre-summary, FHA is looking to make three major changes that could hinder the market’s momentum: increasing FICO score requirements, decreasing the allowable percentage of contributions a seller can provide to meet lending guidelines, and increasing the down payment minimum from 3.5% to a whopping 5%.
A lot of what’s attracting the attention to these changes is that standards will become tighter for mainly first-time buyers, yet FHA loans have become a popular and inexpensive option for those who are having a hard time coming up with a 20% down payment for a conventional loan. Although conventional loans will allow borrowers to go down to 5%, they require a buyer to pay for additional fees such at private mortgage insurance (PMI), as well as have a credit score of at least 740. That’s just for single-family homes. Condos are another story. Condos require a minimum of a 10% down payment in order to obtain PMI on a conventional loan. Therefore, FHA is the only option for buyers that cannot even come up with that initial 10% on a condominium.
Also, a seller can currently contribute to a buyer’s purchase through concessions of up to 6%, and many feel that bringing the newly proposed maximum to 3% will be more in line with common norms. However, what most industry professionals are most concerned about is the additional FICO score increase, which hasn’t had any positive influence with a lot of Americans over the last couple years. The requirement had already been raised recently, and FHA is looking at increasing the minimum down payment amount which could put a lot of potential buyers out of the game.
With the proposal of a new bill, the new guidelines would also raise minimum down payment to 5% as opposed to the current 3.5%. It’s important that the program survives and many feel that raising FHA standards could be detrimental. At the same time, the tax credit has certainly pulled a lot of first-time buyers over the fence, and now it’s time for those who sold to continue the stimulation by moving up. Regardless, if FHA doesn’t survive as a viable option for buyers that need help with getting their foot in the door, then there’s not really any other options out there at this time. The next generation of buyers are going to need to pull together more resources and put in a little more effort up front.
That said, it’s really not all that bad of news, compared to real estate-related headlines we’ve gotten used to. In fact, the spin would be that the market has been stimulated, there has been a positive track record of activity, and therefore it’s time to tighten the reins a bit. Of course, being in real estate sales, we’re always “for” programs and incentives that help us sell more product, but there’s not too much on this news to argue. Looking back, is it fair to say that maybe a big contribution to the financial crisis was due to too many loans given to too many people whose credit scores could have had a higher rating? Could it be argued that allowing a seller to assume responsibility on 6% of a loan ($18,000 on a downtown “starter”) for a product they’re selling is really just a creative way to sneak a buyer into a purchase they really can’t afford to begin with? And, is a minimum of 5% for a down payment really too high, or is 3.5% pretty darn low?
The homebuyer tax credit worked! It stimulated the market and people bought homes because of it. Brokers nationwide pushed for the extension at office meetings with their agents, and we’ve all since heard that it has in fact been extended until April 30th, 2010. Those who were not able to close on time for the previous expiration date are of course still eligible, but looking at sales, that’s only a small few over the last couple of months. Probably the most exciting news is that those who were over the income limit to qualify are now included in the stimulus for a credit of $6,500. In addition, the credit is being offered to current homeowners as long as their previous home was used as a principle residence consecutively for five of the previous eight years. Another modification making things easier for everyone is that a buyer must simply be “in contract” (mutual acceptance) by April 30th. After that, a buyer has until July 1st to actually close. Under the previous tax credit, there was a lot of confusion as to when various stages of the purchase and sale process where to occur. There was a lot of “‘had to do by” events that made it stressful for buyers, and even the sellers. Now it’s much more elementary and easier for everyone.
|First-time Buyer Credit||$8000 credit||$8000 credit|
|Current Homeowner Credit||Not eligible||$6500|
|Expiration (Must be in contract by…)||undefined||April 30th, 2010|
|Closing Date||Nov. 30th, 2009||July 1st, 2010|
|Income Limits||$75,000 (single)$150,000 (married)||$125,000 (single)$225,000 (married)|
|Limitation on Cost of Home||none||$800,000|
The mortgage industry is now being forced to take part in a positive new trend as we close out the new millennium’s first decade–transparency. There’s no arguing that businesses which have modeled after this behavior have not only forced upon themselves the additional responsibility of maintaining a higher level of integrity, but have also shown to do more business. Imagine that! Some of the changes that are being proposed is to explain “fine print” in “plain English” so that the American home buyer can actually understand what they’re signing. Hidden fees that pay a broker for selling a higher-cost loan are also looking at being banned. Considering that competition may have been one of the industry’s ultimate self-inflicted causes for its own fall, competition will also likely diminish, since those that cannot make the procedural changes will be forced out of business.
The days of “creative lending” may thankfully also be a term of the past. Those proposing new lending standards are suggesting borrowers first be offered a “plain vanilla” mortgage. If a borrower is to be offered anything other than the likely 30-year fixed-rate mortgage (among other basic loans), people will be required to opt into them along with being warned that they are doing something unusual.
Bottom line is that lawmakers are working to prevent another mortgage crisis from happening again by making the process more understandable. We suspect that the $8,000 tax credit will not be extended since it seems to have definitely increased buyer activity during a recession. However, as the end of the year creeps upon us, there will be more of a need for buyers to remain educated on qualifying for a mortgage. Here is a list of useful websites the Seattle Times put together:
Good primer on different types of mortgage borrowing.
Federal Deposit Insurance Corp.
Features guidelines and tips for securing a mortgage.
Home Loan Learning Center
Discusses a range of borrowing topics, including qualifying for a mortgage and mortgage types.
Home Mortgage Calculator
Provides insights on how much to borrow for a mortgage.
Mortgage Info Center
Offers dozens of mortgage-borrowing tips over five pages.
Cramer: Remember, it’s easy to miss a bottom if you aren’t paying attention to the signs.
Spot approvals for FHA loans are said to be cut in October, however investors have to buy the loan, then sell back to FHA. Therefore, investors may cut spot approvals sooner than October 1st. One of our preferred lenders has done several for us, and has recommended that if anyone is looking to make a purchase using a spot approval, it would be wise to do so sooner than later. Although buyers will be able to still get FHA loans on FHA approved properties, options will be extremely limited considering many of the older buildings downtown still have not yet been approved. Currently, the following FHA Spot Approval Guidelines must be met:
- The legal documents of the homeowners association do not contain a right of first refusal or restrictive covenant.
- The unit is part of a condominium regime that provides for common and undivided ownership of common areas by unit owners.
- The project, including the common elements, and those of any Master Association, are complete and the project is not subject to additional phasing or annexation.
- (a) There are no special assessments pending.
(b) No legal action is pending against the condominium association, or its officers or directors.
- The common areas have been under the control of the homeowners association for at least one year.
- At least 90% of the total units in the project have been sold.
- At least 51% of the total units in the project are owner-occupied.
- There are no adverse environmental factors affecting the project as a whole or individual units.
- No single entity owns more than 10% of the total units in the project.
- The units in the project are owned in fee simple or the units are held under a leasehold acceptable to FHA.
- The homeowners association has adequate common area insurance coverage. General liability, replacement coverage, etc., reflect the character, amenities and risks of the particular development. Flood and other insurances should be carried when applicable.
- General maintenance level of common elements is acceptable and there is no deferred maintenance, based on the comments by the Appraiser and/or the pictures.
- The homeowners association has a reserve plan and a reserve fund, separate from the operating account, that is adequate to prevent deferred maintenance.
- (a) For projects consisting of over 30 units, no more than 10% of the total units are encumbered by FHA insured mortgages.
(b) For projects consisting of 30 units or less, no more than 20 percent of the total units are encumbered by FHA insured mortgages.
Developers now apply for FHA approval of the entire project during development, but with the lack of supply Seattle is expected to have, getting a FHA loan can be more difficult come the final quarter of the year if you’re seeking a unit in a building that has yet to get approval. Contact us for more information.
Business Week Magazine online featured an article about Seattle’s prevention of overbuilding last week, which clearly favors an optimistic view for current homeowners. Consultant Richard M. Gollis, founder of the Concord Group in Newport California, was quoted as saying, “Give sales, demographics, and job growth, we expect the inventory in Seattle to burn off faster than in other markets.”
Just based on the city’s physical demographics alone, a local builder points out additional constraints when building, since the city is between the Puget Sound, and Lake Washington. While the supply of homes nationally averages a rough nine months to swallow, Seattle’s estimated supply is an estimated five months.
“…cities with low inventory will bounce back sooner than the rest of the U.S. Tight supply in Seattle—much like in Dallas, Denver, and Portland—should set the stage for recovery in the next year or so.”
Still, many are waiting for the Seattle market to hit bottom, as if the city hasn’t already. With Miami looking at a 40-month supply, numbers and expectations are skewed. However, the article gives an example of homeowners who have recently received multiple (five) offers the day after going on to the market. Additionally, we ourselves have had a buyer inquire about two properties that are now already pending.
Building restrictions—and the city’s unique geography—should help lift prices
2007 MEDIAN HOME PRICE
2008 MEDIAN HOME PRICE