Morgan Planners Befuddled By Strange New Ideas

The Standard Examiner has an amusing article this morning about county officials trying to make sense of an Envision Morgan study.  The study asked 700 citizens about how they wanted thier community to handle land use and development in the years ahead.  This seems similar to the Community Plan process that Ogden does for its various neighborhoods.

What is really interesting is that the county planner doesn't like the results of the study.  Here is a quote from county planner Grant Crowell:

“There appears to be a segment of the population not represented in Envision Morgan,” Crowell said. “People don’t like clustering and permanent preservation of open space. That’s what I’ve heard since I’ve been here.” 

And yet the study says:

“Morgan residents envision significant     open space conservation, with a goal of permanently protecting lands with a variety of uses and characteristics” including farms, ranches, river corridors, mountains, viewsheds, trails and recreation spaces, according to visioning documents.

Unless the 700 respondents were hand picked by Envision Morgan for their open space preserving bias, I would say that Mr. Crowell may be on shakey ground with his own community.  If participation was voluntary as the Ogden process is, then the neighbors that care the most (by showing up to meetings) win the most in the process.  The complaining that Mr. Crowell cites likely comes from folks who care so little about thier community that they failed to show up to any of the Envision Morgan meetings.

Ogden experienced a similar thing with the East Central Bench (Trolley District) Community Plan.  The inital meeting was presented in English AND in Spanish.  Unfortunately, there weren't any spanish speakers in the room that I could tell.  A translator was on hand even to help.  Given the 50% population of latinos in the community, it was shocking not to have a significant presence there at the meeting.  Even after we broke down into smaller steering committees for regular monthly meetings, the city staff had to compel some latino stakeholders to the meetings.  The meeting I attended where this was the case was very interesting. The stakeholder was quite disinterested in the meeting altogether and really didn't want to contribute to our discussions.   


The bottom line is that involved citizens will always steer the community in the best direction for involved citizens.  That is how democracy works.  Morgan leadership would be wise to listen to their community.    

Following the Numbers....

In a follow up to yesterday's somber post, I thought I would review the numbers and try to determine the implications of a possible change in FHA lending and interest rate increases.

What I found was pretty surprising.  Here are the results in an easy to digest graph form (click to enlarge):

This first graphs shows the minimum out-of-pocket expenses allowed under FHA rules.  The best case scenario for current buyers it to put 3.5% down on the home and have the seller pay closing costs.  Under proposed changes to the guidelines, buyer's closing costs would increase by .5% of the purchase price and sellers would only be allowed to pay up to 2% of the purchase price in buyer's closing costs.  On top of that, buyers would need to bring 5% of the purchase price to closing for a down payment.  The premium price scenario is slightly better since the interest rate on the loan could be increased so yield-spread could be used to pay for some closing costs.  However, given yield-spread's limitations, its not a huge help.

These simple changes to FHA guidelines would more than double what current buyers need to bring to the table.  If these changes take place, expect to see a buyer's exodus out of the market because they simply haven't saved enough cash to buy a home.  Although I support FHA tightening its belt, it means Realtors will need to tighten theirs too...yet again...
 

The next chart demonstrates what kind of payment shift our market may experience over the next year or so as interest rates increase.  The Fed is scheduled to stop buying Fannie Mae and Freddie Mac mortgage debt in March of next year.  Also, in April, the first time home buyer tax credit is set to expire.  The tax credit doesn't affect interest rates, but interestingly, demand for housing should peak with the expiration of the tax credit just as the Fed starts to allow mortgage rates to increase.

The chart above shows you what a payment would be like for a $100k purchase given different interest rate scenarios combined with a change in FHA rules.  Rates are expected to jump just a half a point.  However, market forces may push them up higher later.  The implication is that buyers qualifying for first time homes are going to want to keep thier payments within thier budgets.  If they can't increase their payments, they need to buy less home.

Hence, our next chart. This chart reveals what a buyer's payment on a $100K home is today versus what that very same payment will buy them under new FHA guidelines and higher rates.     

 As you can see, if rates just go up to 6.875% instead of today's 5%, the same family that bought a 100K home will only be able to afford an $83K home.  I can tell you there is a pretty big difference between a $100,000 home and a $83,000 home.

This downward shift in purchase power would apply across all classes of homes.  It means that people will be compensated for coming to the closing table with larger down payments. The more down...the lower the payment.  It makes sense.

I don't think we are in for a shock in interest rates. However, what I do believe we are in for is a slow but steady increase in rates as our economic equilibrium finds itself and we get back to the old-timer practice of putting money away for savings.  The big shock, if it comes, will be the changes to FHA.

Like the good squirrel, I am stashing nuts away in my tree for such an occasion.

WARNING: Troubled Markets Ahead

I wrote last month about how FHA has been facing problems keeping its losses from foreclosure under control and some of the proposed solutions.

Yesterday I read more on the issue.  FHA is looking at many options but here are a few that are on the table:

• Higher Downpayments - raising downpayments from 3.5% to 5%
• Higher Mortgage Insurance Premiums - increase mortgage insurance premiums from 1.75% to 2.25% of the loan amount
  
• Cut Seller Concessions - Cut allowed seller concessions from 6% of purchase price to just 2%.
• Tighter Underwriting Guidelines - move to risk-based lending rather than today's generous model

These are some significant changes if they are implemented.  In discussing this situation with a loan officer collegue, he indicated that it may be possible to "premium price" loans so that many of these expenses can be paid for the buyer.  In other words, since lenders give financial incentives to brokerages to sell higher interest rate loans, increasing the loan interest rate above prevailing par rates could provide enough incentive money to pay for buyer closing costs or MI premiums.  The drawback of course is that mortgage payments go up when you increase rates and since buyers shop for payments more so than price points, they must be willing to accept less loan (and home) for the same payment.  It means buyers will have to expect to get less home for their money...an awkward adjustment at best.

Now the big question is WHEN will FHA make these changes?

That brings us to the next interesting piece of news.  Interest rates have been incredibly low of the last year because the Fed has been buying Fannie Mae and Freddie Mac (Agency) mortgages.  This artificial demand for agency mortgages has pushed rates down. The Fed can't buy the debt forever.  In fact, we know the date that they are scheduled to stop buying - MARCH 31, 2010.

What will this do to rates?  By all estimations, it will increase rates .3 to .5 above where they are today.  So, if rates jump up after the Fed purchases end, and FHA drops the hammer on guidelines, we may see another round of market contraction sometime in 2010.  It will be tough to "premium price" a mortgage if the rates are already inflated due to natural market conditions.  If this scenario plays out, we may actually not be at the bottom of sales volume or pricing for homes yet.

Although I am encouraged that most of the excesses have been blown off from the market bubble in Utah, we are entering a new phase of shifting fundamentals that include structurally high unemployment and wacky government interference.  Unemployment doesn't scare me, the market has already been priced to our existing unemployment.  It's the government interference in the market, however, that keeps the ship rocking.

Lets brace ourselves for a very interesting 12 months ahead.

Flipping Homes: Making Money In A Down Market

In March I posted Analysis of a Bargain: 824 24th Street.  Well today I wanted to do a post-mortem follow up on how the sale of this flip property went.

You will recall we purchase the property for $49,900.  Our initial repair expense estimates were around $20,000 but the actual expenses turned out to be around $30,000.  Even after a thorough inspection we found some things that needed to be addressed.  To their credit, my clients have a penchant for doing things right rather than glossing over defects.  Therefore, you likely won't find the homes they are reselling landing back in the foreclosure cycle.

Here is a breakdown of the profit found in this property.

It took about 6 months to complete the rehab and sell the property.  Based on this situation, my clients experienced a one time return of 19% on their investment.  If you annualized this, say by doing two flips like this per year, the annual return on investment is almost 40%!

This just proves again that money can be made in this marketplace.  It takes the right combination of funding, contractors, and vision.  But, managed properly, it rewards everyone involved.  The investor makes his return, the contractor has work, and the end buyer has a great home to live in.

Animation: The Great Recession

click here to view animation

As we approach Thankgiving day, I thought I would post an animation that would inspire those of us living in Utah.  This is one of those "wow, I am thankful I don't live there" sort of things.

If you thought Utah's economy was lousy, click on the animation and be grateful for what you have and where you live.

Playing Hot Potato: My Deferred Maintenance Timebomb

One of the units in my fourplex recently became vacant after an 18 month lease. I was doing some improvements to the unit today when I went into the bathroom and noticed some bubbling of the wallpaper.

Curious, I scrapped the bubble off the wall hoping to find the source of the problem.  I followed it to another bubble, and another, then to the ceiling where the sheet rock was soft.  I started toying with the sheetrock and pulling out the soft parts.

What I discovered was evidence of past leaking.  My tenant complained of a leak, which I believed I had addressed, but apparently there was more to the issue.  Then, I discovered the craziest repair I have ever seen.  Somebody didn't want the ceiling getting wet and rotting again so instead of putting sheetrock on the ceiling they put concrete...two inches of it!

Who hangs concrete on a ceiling?! Whoa?! (NOTE: I actually know the name of the person responsible for this work, call me for details.)  With the metal mesh to hold this atrocity together, it came down in one giant piece.  Needless to say, it weighed a ton. I am glad it didn't fall down on its own and clock one of my tenants.

Finally, so much of the ceiling and wall seemed to be affected; that I decided just to take it all down and start over.  I figured it seemed like a good opportunity to address the galvanized pipe and BX wiring.

The lady who sold me this building had bought it from a local investor notorious for this kind of work.  I thought I had worked out all the kinks in the property. It looks like I have a few more to address. Nevertheless, 20 minutes with a sledge hammer makes for fast work.

FOR SALE: Historic 1925 Bungalow - Ogden Trolley District $84,900

Good, Fast, or Cheap: Spin the Contractor Wheel

I had a conversation recently this week with a colleague about contractors.  He made a comment to me about contractors that was new to me but made complete sense.  He said, "With contractors you get one of three things from them, you get good, you get fast, or you get cheap."  Unfortunately, from my experience, he is right.  These things are almost completely mutually exclusive.

I had an experience this morning that reminded me about this saying.  I have owned my rental next door to me for about 3 years now.  The back porch was clean when we bought it.  However, despite this, over the last couple of years the porch has deteriorated badly.  As it turns out, the property was "flipped" just a couple years prior to our purchase by a gentleman named Jonathan Reyes.  Jonathan used "fast" contractors to get his work done.

This morning I found the facia from the porch falling off.  It seemed rather odd that new facia would be falling off after just a few years.

In fact, it seems even more strange that it fell off when the contractor used 17 staples to keep it in place.  Maybe 15 just wasn't enough to do the job.  Turning the board over reveals why...

The contractor used the wrong length of staple.  A nail gun would have been more appropriate.

Anyway, this is what a "fast" contractor will do for you.  They probably knocked the renovations out in a couple weeks and moved on.  Predictably, the work didn't last and now I have to rebuild the back porch.

I will keep you updated on the project when its finished.

FOR SALE: Historic 1903 Cottage - Original Woodwork!

High Rise of Doom: Made In China

I found these interesting photos while online this week.  A 12 story condo complex was having a parking garage excavated on the south side of the building while the dirt was piled up on the north side of the building.  Apprently, the lateral forces created by the difference in hieght and weight of the dirt surrounding the structure broke the pylons of the building.

I would have loved to be there when it tipped over.  I wonder if this was the same construction company that fixed the Oakland Bridge in San Fransisco.

Weber County Sales Bottom! October Sales Up 25%

Monthly sales in Weber County may have found their bottom in September as sales in October reported a 25% increase over October 2008.  Great news!  Weber has not had a monthly increase in sales year-over-year since May 2007...28 months ago.  Its worthy to note that some of this large increase may be attributed to first time buyers hoping to utilize the $8,000 tax credit before its initial expiration date of December 1st.  Now that the deadline has been moved out to next April, we may see the the sales volume subside a bit.  The question will be whether sales are more or less than they were at the same time last year.  We will find out.

It at least feels like the market has found its equilibrium.

Sales In The Trolley District: What Is Going On?

Last year I created a chart showing sales in The Trolley District over the last decade.  I was hoping to find some pattern or be able to read local event and market turns into the chart.

I created a new chart and annotated it with what I thought were pertinent facts:

The Trolley District market has suffered some setbacks locally and more from macro-economic factors over the last 10 years.  The bottom of the trough came in 2002 with the death of the Mall in downtown.  This point market the end of Ogden's 40 year slide into economic oblivion and the beginning of a new rennaisance in economic vitality.  On top of the negative impact the Mall closing had, Utah overall was in the grip of a recession.  As time moved forward, prices bottomed out and record low interest rates spurred buying.  By 2004, loose lending prevailed and supported higher than average sales volume.  As mortgage guidelines became rediculous, sales surged in 2007.  The party ended in August 2007.  Notice the 50% drop in sales volume in just two months.

We now seem to be at a market equilibrium point based on nationalized lending and a persistent recessionary environment.  I call this the "new normal".  Ironically, Ogden economic factors are up in comparison to 2002, the last time we saw sales this low.  It just goes to show the magnitude of how the larger economic picture is affecting things.  Nevertheless, I anticipated this kind of volume for the foreseeable future.

 

Photo of the Day: Indoor Graffiti Gallery

This morning I went shopping with a client.  We walked through an REO where the owners appeared to be pretty upset about the whole foreclosure ordeal.  Here are the photos (Warning: some of the writing may be explicit.):

And finally, when you need more outlets in a room, you can always draw one on the wall:

They may need to draw another outlet that has a ground.  That two prong setup isn't up to code.

Mind Over Matter: Moving Antique Radiators

When my wife and I purchased our home we removed all the radiators to refinish the hardwood floors.  Since they were extremely heavy, I paid a friend of mine to move them. He was 6' 10" and solid muscle.  Well he left town around the time we got our floors finished and left it up to me to put the radiators back.  I got all of them put back except for one....the biggest one.  That was four years ago.

Well today, I decided I that I had had enough of staring at that radiator on my back porch.  I put together a plan to move this monster.  The radiator is solid steel and likely weighs 1000-1500 pounds.  Not an easy chore...and there were safety concerns as well.

Here is a photo of the radiator before we removed it.  Its the one next to the fireplace.

We had three clawfoot tubs sitting in my back yard that I had collected of the past few years and in order to move them, I constructed some big piano dollies.  I put those dollies to work for this move. 

I rocked the radiator back and forth and shimmed it up to a hieght that would allow me to scoot the dolly underneath each end.  Once we did that, we started the slow move.  Here is the radiator moving through our kitchen door.

 
We ran into trouble at this point.  It became very obvious that I did not construct the dollies to handle this kind of weight.  It could handle claw foot tubs but not this giant radiator.

The screws in the frame started to rip out and put our move in peril.  We continued to move although very slowly.  Then we realized that the casters on the dolly were putting indentations in our wood floor.  AAAH!

We layed blankets down to soften the blow that the casters were making and that seemed to help alot. 

Eventually, we got the radiator into final position for de-shimming and lowering to the floor.

Getting the radiator into place was quite difficult.  The plumbers that installed this system 101 years ago were excellent craftsman.  The space between the pipe fittings in the floor and the fittings on the radiator had a gap of less than 1/16".  It was a very tight fit that took a lot of levers to put everything in place.  It was very awkward trying to manuver that much weight around in such a precise way. 

The move from the back porch to this spot took just over 90 minutes.  It was a pretty big adventure.  Had the thing tipped over it would crushed anyone in its way.  It would have destroyed our floor wherever it landed as well.  By taking it slow we survived.  Now on to another project in the house...

Uncle Sam Slips Noose Over Neck of Housing

In a major shift, Fannie Mae announced today a new program called Deed-for-Lease.  Instead of foreclosing, or just deeding the home back to the bank and walking away, Fannie Mae will now let you rent the home from them instead.  

Here is the press release:

Fannie Mae (FNM/NYSE) is implementing the Deed for Lease™ Program under which qualifying homeowners facing foreclosure will be able to remain in their homes by signing a lease in connection with the voluntary transfer of the property deed back to the lender.

"The Deed for Lease Program provides an additional option for qualifying homeowners who are facing foreclosure and are not eligible for modifications," said Jay Ryan, Vice President of Fannie Mae. "This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities."

The new program is designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under Deed for Lease, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at a market rate.

To participate in the program, borrowers must live in the home as their primary residence and must be released from any subordinate liens on the property. Tenants of borrowers in this circumstance may also be eligible for leases under the program. Borrowers or tenants interested in a lease must be able to document that the new market rental rate is no more than 31% of their gross income. (emphasis added)

Leases under the new program may be up to 12 months, with the possibility of term renewal or month-to-month extensions after that period. A Deed for Lease property that is subsequently sold includes an assignment of the lease to the buyer.

Note the bold text there about 31% rent-to-income ratio.  Most banks set reasonable guidelines to protect their bottomline.  I use a 33% rent to income ratio when leasing my own property.  However, Fannie Mae is not a normal private bank.  It's government owned.  This has other implications. 

The major implication for this announcement is that Uncle Sam is not only now the 800-pound gorilla in the mortgage market but is soon to become a major player in the rental market as well.  When you issue 95% of the loans you will own 95% of the foreclosures.  If you think things are crazy with Uncle Sam tinkering with mortgage financing, wait until Uncle Sam owns a bulk of rental property and starts tinkering with rents or application requirements for rent.  I won't go into a long political rant here but, frankly folks, this is scary stuff.

What happens to you when you don't vote for your landlord?  Who in the government determines what "market rents" are?  What happens when the government decides to rent out the vacant property it already owns?  Be prepared for the next wave of unintended consequences.

Things to Do In Ogden: Hidden Valley Trail

A couple weeks ago my father and mother flew into town from Texas to visit.  My father particularly wanted to go hiking.  Our initial plans called for a hike up Mt. Nebo in Utah County.  Snow levels were an issue so we decided on an unfamiliar local trail...The Hidden Valley Trail.

Our adventure began at the top of 22nd Street.  There is a parking lot and trail head that makes for an easy start.  Above is the trail marker and my father.  The trail to Hidden Valley is a turn off of the more popular Indian Trail.  Finding it is a trick though.  According to information I found on the web, the turn off is about a half mile up the trail and the turnoff is marked by a rock with the trail name on it.  Well, we found that rock.  The rock nor the trail was very obvious at all.  Somebody wrote on a non-descript rock with lipstick.  Just so you don't miss it,  I have taken this photo for you.  Click to enlarge.

Once we made the turn the trail got steep very quickly.  However, it was beautiful. The leaves were at the peak in color changes and the temperatures were perfect.

The trail turns up a canyon that doesn't look like much from the valley floor but once you are there you get a feel for the magnitude and scale of the mountain.  It was a highly vegetated trail which also made it interesting to hike.

Soon Mt. Ogden peak appeared.  Just the right mix of clouds, sky, rock and snow.

At the top of the trail is a very nice campground with an awesome view of Mt. Ogden and Taylor Canyon.  You see parts of Taylor Canyon that are hard to view from the city.

This is where our real adventure began.  My father and I thought that the trail continued in a loop down to Taylor Canyon and back to the city.  We were mistaken...but not before we got to far to turn back...

After wandering onto a game trail and then pushing through scrub oak for a quarter mile we came to this precipitous drop.  It's pretty much a sheer face of granite that drops into Taylor Canyon.  We didn't want to brave going down this so we pushed further east along the top of this rocky feature until we came to a creek bed at the upper reaches of Taylor Canyon.

The creek provided us with relief from the scrub oak since I lacerated most of my foreams and some of my face by pushing through the thick hardwood vegetation. 




One of the really weird features was that we kept finding deer hair in the creek.  It was everywhere and in big clumps.  We couldn't figure out what this was or how it got there.  Finally, as we headed down the creek bed we heard some noise.  There, lurking on the other side of a giant bolder we found this....

These two persistent fellahs shot this dear early in the morning at the top of the mountain and had been hauling it for over 8 hours down the same trail we had taken .  We need to give them an award for tenacity.  Notice the bald patches on the dear?

Eventually, we got on the main trail and headed out of Taylor Canyon back to the Bonneville Shoreline trail.  It was certainly an adventure.

The best part of these hikes is that they are just moments from the city.  In fact, housing is just a few hundred yards away from the shoreline trail.  Yet it feels like a separate place away from civilization.

Our final view was of the city in full fall colors and a great glimps of the skyline of Downtown.

Its Great to Live in Ogden!

Ogden Lands Yet Another Sports Company

Yesterday's Standard Examiner reports that QBP, a bicycle parts distribution company will be building a distribution warehouse in Ogden.  The new building will be located near the BPO on 12th Street.  The new facility will be constructed over the next year and will employ over 100 people when complete.  Excellent news!