I’m returning to DC after having met with an asset manager of a quasi government organization that buys most of the mortgages in the country.  We went to lunch and discussed the future of the REO business (bank foreclosures) and it is clear there are several more waives of foreclosures to come before we’ve flushed out the challenges in the real estate market.  There are essentially four areas of REO assets and we have really only cleared through one.

1. Subprime mortgages – we’re mostly done with the bulk of these
2. Prime mortgages – moving through this inventory now, unemployment is causing this to increase
3. ARMS –resets coming in the next couple years which will put more inventory on the market
4. Commercial – the damage has just begun

Additionally, lenders are holding back huge stock piles of inventory known as the “ghost market” and releasing it slowly.

The good news for sellers though is I think most of the price declines have stopped in the DC area.  We are now seeing many multiple contracts (as many as 20) on foreclosures and the prices in several cases have fallen to below the material cost of constructing the home itself and sometimes below the land value!  (not in Dupont Circle though) Just as prices could not remain unsustainably high, they cannot remain unsustainably low either.

Buyers:  you’ve missed the best time to buy which I think was last fall, yet now is still an AMAZING time to buy.  My question to you is – what in the world are you waiting for?

This Newsweek article is a great summary of some post-election options for mortgage relief.

Of course, having both a president and a president-elect (as well as an outgoing and an incoming Congress), might further complicate a bailout.

With all the media attention on the so-called credit crunch, it sounds like there are no mortgages available unless you have perfect credit, a 20% down-payment, and helped a little old lady across the street this morning. Not so – FHA to the rescue!

The Federal Housing Administration is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.  FHA loans had fallen out of favor over the past few years as people chose sub-prime mortgages with low teaser rates and little documentation, but currently one out of every five mortgages is FHA insured.

Do you need 20% down?  The great news is that FHA only requires 3 percent down. 3 percent!  And that 3 percent can come in the form of a gift or grant.  FHA borrowers only need to have $500 in a transaction.  All the while, FHA mortgage rates are as good or better than their conventional counterparts.

Low or no down payment, extremely competitive rates and easier qualifying, no wonder FHA is moving up the charts!

Today’s market plays to the advantage of buyers, who should be swooping in to make the most of reduced housing costs and favorable interest rates. Many are sitting by and waiting for the market to turn around. But when the market turns, today’s bargains will be yesterday’s missed opportunities.

While home prices may drop further, it is likely that these decreased prices will be accompanied by increased financing costs due to rate cuts by the Fed. This may be counterintuitive, but cuts in the rates that the Fed loans money to banks can result in higher interest rates on mortgages. This means that any money saved on paying less for a house in a few months time will be offset by your having to pay off their mortgage at a higher interest rate making “playing the waiting game” a waste of time (and very little fun).

This rate increase isn’t just speculation. Just a couple of weeks ago, in early February, the fixed mortgage rate jumped a full half-percent, making it the fastest rate increase in 20 years.

The following scenarios demonstrate how even as home prices may drop, monthly mortgage payments basically stay the same due to increased interest rates: Prices decrease by 5% and interest rates increase by 0.5%. A home priced at $218,900 with a 6.04% interest rate will see a monthly mortgage payment of $1,054. If there is a price drop of 5% to $207,955 and an increase in the interest rates to 6.54%, the monthly payment will be $1,056. Consider a 10% price drop to $197,010 and an interest rate increase to 7.04% the payment will be $1,053.

We currently have a large inventory of prices and sellers motivated to sell with historically low interest rates that seem to be rising quickly. Many of my current clients kick themselves for not purchasing in 2002 or earlier. I just hope the kicking won’t continue because they waited out the market again.