A CONTRARIAN VIEW ON NEW HOUSING

A news bulletin from the Denver Post just flashed across my BlackBerry: NEW HOME SALES HIT RECORD LOW IN JANUARY.

My response: GOOD.

This story in the Post is meant to say the construction industry is in trouble, that builders continue to suffer, and that housing is falling off a cliff.

My response is different than that:

CONSUMERS HAVE FIGURED OUT THAT BUYING NEW CONSTRUCTION IS DANGEROUS, IF NOT CRAZY, IN THIS PRESENT MARKET.

Let me explain something that I have seen extensively over the past three years. It has to do with new construction. It has to do with builders. And it has to do with changing nature of consumer expectations.

I wrote a post over the weekend called “The Consumer is Angry”, and three days removed from that post I stand behind it 100%. The consumer in America today is mad (and I could use stronger language). There is anger at government, institutions, banks, Wall Street, real estate brokers, and yes, builders.

Builders got rich during the boom. And that’s because builders sell a retail product, with thicker profit margins, because the product is shiny and new. And when times were better, consumers would pay for it. But there’s another reason that new construction soared between 1995 and 2007, and that is because anybody who wanted to buy a shiny new house could do it, thanks to the magic of “easy financing”.

Let’s talk about financing today – it’s hard to get, if not impossible. So what did that do to the buyer pool? It killed it. And what did that do to values? Caused them to fall. And what did that do to homeowners? Put them under water. And what did that do? Made it impossible to refinance, made it difficult to sell, and made it hard for many to “get out” without simply mailing the keys back to the lender and suffering the consequences of foreclosure.

Those of you who know me know that I operate in an ultra-protective mode with my clients these days. Unless you have money to burn, why would you even look at new construction right now? Builders have deeper pockets than you do, they can discount in ways you can't, whenever they need to, and most don't care what happens to the buyer once he closes.

Just yesterday, I received a promotional email from a local builder boasting about “Huge Price Reductions” at a high-profile condo tower downtown. I looked at their email and shook my head, thought about it, and then fired back a note (which will probably never be read) – “what about everyone who already paid retail to move into your development?”

So here’s what I see in the Post’s newsflash this morning – I see a wiser consumer, xxxxed off, who says he won’t be fooled again.

That’s good news.

THE CUSTOMER IS ANGRY

I ran across a post online recently from sales trainer Jeffrey Gitomer, who always seems to have a handle on how the world of sales is changing. And believe me, it’s changing.

Gitomer can say things that are shocking sometimes, but the truth is that I share a lot of his sentiments. The “customer”, as we identify him, has been laying low for the past 18 months, sorting through his stock market losses and wondering what to do next.

He’s been watching in disbelief as his 401k fell apart, his home lost value and his company dropped 30% of its workers.

Roger Daltrey once sang “We Won’t Get Fooled Again”, and I think the consumer of 2010 is singing the same song. Trust has been burned. The consumer is angry.

He (or she) is also (most likely) in worse shape financially than he was two years ago, and that means he’s coming back more cautiously, wiser, and he’s going to do his homework before signing on the dotted line. As he should.

Here’s Gitomer’s list of what the new consumer looks like, post economic meltdown:

• He's going to decide somewhat slower. He's been hesitating for more than a year.

• He's angry about the value of his home, and the value of his investments.

• He will not be doing business the same way it's been done before.

• He will not be advertising the same way he advertised before.

• He will not be buying a car the same way he did before.

• He will not be investing the same way he did before.

• He will not take your word for things anymore. He’ll need to see the proof, please.
• He's online. Checking out your blog (or wondering why you don’t have one).

• He's socializing. Telling everyone what's happening in his world.

• He's Tweeting, Facebooking, he’s on Linked-In. Social media is a firestorm.

• He's blogging about his experiences with you, for the world to read.

• He's Googling everyone.

• He's texting. A lot.

• He's using his mobile device to do pretty much everything.

• He's WiFi-ing in his hotel room, on the plane, in Starbucks, and at home.

• IF he's reading a paper, or getting the news, it's online.

• He wants technology in the transaction – his time is more valuable now.

• He is value oriented, but will look to price as part of the decision.

• He wants a relationship, based on trust, which you will have to earn.

• He wants, needs, and expects GREAT service after the sale.

• He does not want to wait for anything or anyone.

• He needs help and expert advice – but it better be legitimate.

• He's looking to you for ideas and answers.

• He knows as much about your product as you do.

• He demands the truth. All the time.

• He no longer trusts the institutions he used to hold sacred.

• He needs to be understood and feel your sincere concern.

• He wants you to know that while you are qualifying him, he is qualifying you.

The world of sales is a tougher place today than it was two years ago. But as I have said in conversation after conversation, we are now in a market that demands skills. A market that demands ethics. A market that won't tolerate BS from anyone, at any level.

We are not going through a "cycle", in my opinion, but rather, we are going through a "revaluation". I'm talking about the stock market and real estate prices... but I'm also talking about each one of us. I'm talking about employees, salespeople and professionals. I'm talking about pastors, construction workers and CEOs. Our value is being tested in this new market, and skills are the new currency of the 21st Century.

You can fear this new market, or you can embrace it as the impetus for positive change in your own life. As always, it comes down to attitude and perspective.

Game on.

IT'S ONLY FEBRUARY, BUT THE SPRING MARKET HAS OFFICIALLY ARRIVED

February has been an interesting month, at least for statistical geeks like myself. The inventory of homes for sale in the Denver MLS tightened up at every price point between January and February, signaling that the “tax credit rush” is now on and even though the calendar says February 17, the spring market of 2010 is officially here.

For the next 71 days, it’s going to be crazy, especially below $250,000. If the $8,000 first-time buyer tax credit of 2009 pulled in all of last year’s first time buyers, plus many of those who otherwise might have waited until 2010 to buy, the extension of the tax credit is now shoving the 2011 crop off first-time buyers off the fence and probably pulling in some 2012 buyers as well.

The $6,500 so-called "move up" buyer's tax credit is also driving activity, with buyers who have owned a principal residence five of the previous eight years eligible for this credit, which also expires April 30.

Let’s recap the influence the tax credits have had on the market.

As of today, homes priced under $250,000 in the Denver MLS account for 34% of the overall listing inventory, but 67% of all transactions. By comparison, homes above $600,000 account for 18% of the inventory, but just 5% of the transactions. So it’s obvious the activity remains concentrated at the lower levels of the market.

Inventory continues to fall. At the end of January, there were just 17,465 single family homes listed for sale in the Denver MLS. That was down 19% from one year earlier, and 45% from the August 2007 peak, when we had more than 30,000 homes for sale in the Denver MLS.

The absorption rate for homes priced below $250,000 fell sharply this month, from a 4.22 months supply in January to just 3.25 so far in February. That’s the clearest evidence of the “spring surge” I referenced at the start of this post.

There was also significant improvement in the $250,000 - $400,000 category, where inventory dropped from a supply of 9.98 months to just 6.16 months. While six months of inventory is considered a "balanced" market (favoring neither sellers nor buyers), the tightening we have seen suggests that you've got both first-time buyers and move-up buyers hitting this sector of the market in force.

However, the question must be asked again: what happens to these numbers after the tax credits expire April 30? Keep in mind, as someone who is "out on the streets" every day working with clients at many different price points, it's clear that buyers are driven by price and value, and they simply will not overpay for anything as long as they have fear about the economy.

Above $400,000, the inventory of unsold homes spikes up to 13.77 months. And so you can see how things just start to tail off as you work your way up the pricing ladder (above $1 million, the inventory of unsold homes is nearly 32 months).

What can we expect going forward?

Well, here’s what we have we have for buyers for the next 71 days: 1) a pair of generous (and highly motivational) tax credits that expire for good April 30; 2) interest rates that are still in the low 5’s, but almost certainly headed higher as the Fed stops purchasing discounted mortgages; and 3) enough motivated sellers and bank-owned listings to find a good deal.

And for sellers? It comes down to one thing – motivated buyers. For the next eight weeks, buyers are out in full force, particularly below $400,000. That means the time to be on the market is right now. When the tax credits expire and rates go up, who’s going to buy your home? There’s a buyer for every home, but when the “gifts” of tax credits and low rates go away, it all comes down to price. And that’s not what sellers want to hear.

Make no mistake – 2010 is not a normal year in real estate, and this is not a normal market. The lion’s share of activity this year is happening right now, and both buyers and sellers may find the market a lot less attractive when rates start climbing and the tax credits expire.

DENVER HOMEOWNERS POCKETED $7.87 BILLION IN EQUITY GAINS LAST YEAR

In a new survey released this week, Zillow.com reports that homeowners in the Denver Metro area pocketed a total of $7.87 billion in home equity gains last year, by far the best performing U.S. market in 2009.

Boston was the second best performing market, showing gains of $3.47 billion, while New York reported the ugliest losses, with homes dropping a staggering $93.4 billion in aggregate value last year.

The Denver Post published a Zillow.com map with its coverage showing which neighborhoods have performed best and which areas remain soft. North Aurora and the I-70 corridor of East Denver remain the hardest hit parts of town, while much of Adams County showed surprising strength after several years of value declines.

Of course, as I say in post after post, generalizations really don’t work in this market. There is such disparity between what is happening at the low end of the market (3 month supply of homes) compared to the high end (32 month supply of homes) that the Zillow report may or may not have much relevance to your particular situation.

Many sub-$200k single family neighborhoods have seen values jump 10% or more in the past year, while homes above $400,000 have lost value. Condos continue to perform below expectations at all levels, while investors have made huge profts by fixing and flipping starter homes for the past two years.

The strong numbers reported by Zillow are likely driven by the fact that, in sheer numbers, there are more entry level homes appreciating than high-end estates depreciating, so the net bottom line looks pretty good.

Overall, it’s good PR for Denver and indicative of a market that is further along on the path to recovery than many other metropolitan areas. If you have questions about how your particular neighborhood has performed, give me a call.

THE "HIDDEN STRENGTH" IN TODAY'S MARKET FOR INVESTORS AND LANDLORDS

Interesting article in John Rebchook's blog today about the long-term prospects for landlords in the seven-county Denver Metro region... although rents and vacancy rates have basically been unchanged over the past year, signs point to a fairly serious shortage of rental units over the next five to seven years.

With more than 30,000 high school seniors graduating each year, and only about 5,000 new apartment units per year coming online since 2001, you can see the opportunity that exists for landlords over the next few years. Add in the fact that Colorado was the fourth-fastest growing state in the country last year and you can see that sooner or later we're going to start running out of housing, again.

It is true that the difficult economic times of today are affecting behavior... the home ownership rate is falling, kids are moving back in with their parents, families are "doubling up" to save money... but sooner or later people will want to get back out on their own, and there simply isn't enough new inventory coming online to meet that future demand.

After the 2001 economic downturn, vacancy rates in Denver spiked by 10% or more and rents crashed hard. But go back and reread the first paragraph of this post... in 2009, in the worst economy in 70 years, vacancies and rents were essentially flat. That's called "hidden strength", and it's an indicator that this decade could be a really good one for Colorado investors and landlords alike.

JOB PROSPECTS BRIGHTER IN DENVER

A theme I have been hitting on repeatedly in this blog is that, in my estimation, there is no such thing as a “jobless recovery”. Until jobs come back, the economy will remain in a broken state.

Jobs are also the biggest impediment to the housing market, now, as well. While the first round of foreclosures (2005 – 2008 in Colorado) were primarily the result of “everyone qualifies” financing, round two is tied to the loss of jobs.

Good news today comes from job search engine JuJu.com, which ranks Denver 9th among 50 metropolitan areas in terms of availability of employment. The JuJu.com survey shows that there are currently about four job seekers for each advertised position in the Denver market. Some of the worst performing areas, such as St Louis and Detroit, currently have more than 15 applicants in pursuit of each advertised job opening.

The JuJu.com survey is more “interesting” than “scientific”, since it doesn’t consider the problem of “underemployment”, which I consider to be a serious issue both in Colorado and throughout the country.

But it does show the relative strength of Colorado, which continues to outperform the rest of the country during these difficult economic times.

COLORADO ON THE RISE WITH RETIREES

Looking for the hot new place to retire? Historically, retirees have flocked toward warm weather climates like Florida or San Diego. Now, according to the AARP, it’s cities like Loveland, Colorado and neighboring Fort Collins that are the new “make sense” destinations for retiring Baby Boomers.

In a special report to broadcast on CNBC March 4, Tom Brokaw discusses how retirement realities are changing for Boomers after the economic meltdown. Moves to the coasts are on the decline, while cities like Denver, Dallas and Atlanta are attracting record numbers of relocating retirees who are looking for a great quality of life along with more affordable housing.

The trend among younger Boomers is a search for more security, more stability and more opportunities, especially for those who wish to continue working in some capacity after retirement. High growth, high quality of life areas like Loveland or Fort Collins offer the best of both worlds, according to the CNBC report.

METRO DENVER ECONOMIC FORECAST - CONFRONTING THE CHALLENGES AHEAD

I sat in on a very informative and educational panel discussion this past Thursday looking at the economic conditions for Metro Denver in 2010 and beyond. The panel consisted of Mark Snead from the Kansas City Federal Reserve, Patty Silverstein from Development Research Partners, Tom Clark from the Metro Denver Economic Development Council, and Steve Westfall, a RE/MAX broker and one of the most prominent REO agents in town.

While Denver continues to outperform much of the nation economically, there’s no denying that we are facing serious challenges in the years to come. In the space below, I’ll summarize some of the key points made by the panel and elaborate on what it may mean for the Denver economy and the Denver housing market.

MARK SNEAD – ECONOMIST FOR FEDERAL RESERVE BANK OF KANSAS CITY

As a board member for the Kansas City branch of the Federal Reserve, Mark Snead studies “the numbers inside the numbers” of the US economy. One of his largest concerns… the massive commercial real estate losses projected for 2010 and 2011, which could result in a 30% devaluation by the end of 2011.

Additionally, American households have lost a combined $10 trillion of wealth in the last 18 months, with the average household seeing its net wealth decline by 17%. These kinds of losses obviously freeze consumer spending, which shrinks demand, which results in layoffs… exactly the scenario we have seen as the nation’s unemployment rate has topped 10%.

The upside for Denver? Energy.

As one of five “energy states” in the nation’s midsection, Colorado is benefiting from huge investments in new technology and the presence of the National Renewable Energy Laboratory (NREL) in Golden. Colorado has the highest percentage of college-educated residents of any state in the country, and the combination of a skilled workforce and new, green technologies will lessen the local impact of the national recession.

PATTY SILVERSTEIN – DEVELOPMENT RESEARCH PARTNERS

Patty Silverstein is President of Development Research Partners, a professional research firm based in Jefferson County that works with businesses and governments throughout Colorado to help identify trends, fiscal economic impact analysis and strategic business opportunities.

In Silverstein’s view, there’s no sugarcoating what happened to our economy in 2009. For the first time since 1938, personal income growth was negative (-2.5%) in the seven county Denver metro area. Retail receipts were down 11.1%, home sales were down 12%, and the region lost more than 55,000 jobs, many of which will not return.

2009 was also the worst year on record for residential real estate construction, with just 3,300 new homes being built. By comparison, the seven-county Denver metro region has averaged more than 17,000 new homes per year since 1980. (Taking new construction offline isn't necessarily a bad thing for existing homeowners, who no longer have to compete with builders)

The sum total of this contraction will be significantly reduced tax receipts, which will cause systemic shortfalls in tax revenue for quite some time. Government functions from public schools and police departments all the way down to animal control and street sweeping will face serious cuts in the years ahead.

The upside for Denver? Massive investments by Vestas Wind Energy and commitments from six different Vestas suppliers to set up operations in Colorado, as well as the progress being made with the Conoco-Phillips new energy campus in Louisville, which will begin operations in 2011.

TOM CLARK – METRO DENVER ECONOMIC DEVELOPMENT COUNCIL

As Vice President for the Metro Denver Economic Development Council, Tom Clark has one job – to recruit new businesses to the Denver metro area. Over the past seven years, Clark has helped to recruit the headquarters of over 40 corporations to Denver.

What does he see today? Clark calls it a “perception gap”.

“People hear that things are great in Denver, and we are attracting thousands of new residents, many from California," Clark said. "But the reality is that things are not as good today as they were three years ago. It’s simply that things are so much worse in other places.”

Clark says the Democratic National Convention did open Denver up to the world in 2008, and there is unprecedented international attention from corporations interested in possible relocations. The “new energy economy” will be a primary driver of growth, with both Denmark-based Vestas and Germany-based SMA (the world’s largest manufacturer of solar inverters) bringing jobs and international focus to Colorado.

Clark’s biggest challenge today? Working with DIA to attract at least one direct, non-stop flight from Luxembourg and Tokyo, so corporate CEOs and senior managers from Germany and Japan can have easier, direct access to Denver.

STEVE WESTFALL – REO BROKER AT RE/MAX PROFESSIONALS

While the Denver metro region saw foreclosure filings fall by 12% last year (an exceptionally strong performance in light of last year’s economic challenges), Westfall says that job losses and national economic conditions are going to keep the foreclosures coming for the foreseeable future.

Working closely with some of the nation’s largest holders of mortgage loans, such as GMAC and Fannie Mae, Westfall says that executives in those companies are bracing for another rough year in 2010.

With statistics showing that 78% of modified loans go back into foreclosure within 12 months, Westfall says that many homes that would have ended up in foreclosure in 2009 are simply being pushed off into 2010.

And consistent with a theme that’s been running in this blog for the past year, the foreclosure problem is creeping up into higher price points while the lower end of the market is tending to solidify.

Citing a 58% increase in his average REO sales price in 2009, Westfall points to the surge in foreclosure filings in higher-end markets like Boulder (+36% in 2009), Arapahoe County (+15%) and Broomfield (+11.8%) as evidence that values are now eroding at the higher price points.

“A year ago, I started telling everyone I know to buy rental properties,” Westfall said.

As the nation’s homeownership rate continues to decline and more former owners become renters, that may not be bad advice.

STARK DIFFERENCES BETWEEN CONDOS AND SINGLE FAMILY RESALE MARKET

Most of the conversation on this blog over the past few years has focused on the single family resale market. There are two reasons for this… first, nearly 80% of the sales activity in our market is made of single family resales, and second, about 90% of my clients are looking to buy or sell single family homes.

Because of this, sometimes we ignore condos, so let me take a few moments to educate you on some of the key differences between the single family market and the condo market, including some of the very serious issues facing the condo market today.

First, in overall terms, the single family market is healthier than the condo market. Of course, this is a generalization, and there will always be localized exceptions to every rule (condos near universities, for example, will be safer investments than condos in the suburbs). But overall, there are some characteristics of condo ownership that have made that segment of the market extra vulnerable to the economic downturn of today.

While the average homeowner will reside in a property for an average of almost 10 years, condo ownership tends to be a shorter term proposition. The most recent average reported by NAR was 4.6 years, which means condo ownership tends to be more transitional in nature and thus, as an investment, they are more volatile.

If you trace back 4.6 years from today, you are talking about the middle of 2005, or the peak of the “easy money” lending era. A disproportionately high number of today’s condo owners got in at the top of the market, with risky financing. Today, most cannot refinance, even if they want to. And without easy financing, the buyer pool has shrunk, leading to a surplus of inventory, leading to a loss of value, leading to an increase in foreclosures, leading to more losses in value… and soon the whole market is spiraling uncontrollably.

Because FHA has traditionally insured a higher percentage of condos than most traditional banks, FHA’s losses in the condo market have been severe. As a result, FHA is in the process of implementing a number of new restrictions on condo financing that will only hurt existing condo owners more going forward.

Last November, FHA was poised to flip the switch on new guidelines that would have restricted lending in condo developments. After outcries from condo owners, home owners associations and mortgage lenders, FHA agreed to phase in its new condo rules, some of which are already in effect and some which will now kick in at the end of the year.

These include:

· Not lending in developments where FHA insures more than 30% of the units

· Not lending in units where owner occupants occupy less than 50% of the units

· Not lending in developments where 15% or more of the owners are delinquent in their HOA payments

· Not lending in units where a single investor owns 10% or more of the units

· Not lending in units where the HOA isn’t withholding sufficient reserves

These new guidelines are going to significantly reduce the number of FHA loans in many condo developments, which will further shrink the buyer pool and (at least in the short term) cause more defaults and value loss.

THREE REASONS WHY RIGHT NOW (I MEAN, RIGHT NOW) IS THE BEST TIME TO BUY

Those of you who know me well know I call 'em like I see 'em. If you are thinking about taking advantage of one of the two generous tax credits currently on the table or buying a home for any other reason in 2010, you need to be looking at houses NOW.

There are three primary reasons why the next 100 days are going to be the busiest days of the year in real estate.

1) Tax Credits to Expire April 30

The $8,000 first-time buyer tax credit and the $6,500 "move up" tax credit (for those who have owned a primary residence at least five of the previous eight years) will expire April 30. You don't have to close by April 30, but you must have a property under contract by that date. In other words, if you haven't gotten your education, done your shopping, written your contract, negotiated your deal and cleared inspections by April 30, there is no guarantee you will receive a tax credit.

And if what happened at the end of 2009 is any indication (when buyers thought last year's tax credit was expiring), by early March the market will be flooded with buyers chasing limited inventory - that spells higher prices, fewer concessions and more compromise as buyers settle for "what's left" instead of what they want.

2) Fed to Discontinue Purchasing Discounted Mortgages

Why have interest rates been in the 4's and 5's for the past year? Part of it is that the economy has gone sour, but perhaps a bigger reason is that the Federal Reserve took the unprecedented step last year of committing to purchase $1.25 trillion (with a "t") in mortgages at discounted rates.

Experts estimate that the Fed's intervention has artificially lowered rates by as much as one full percent. But the Fed announced in December it would end its mortgage purchasing program in March. In simple English, the Fed has been the largest purchaser of low-yield mortgages for the past year. Without the Fed, rates have nowhere to go but up. And the Fed's out of the market 70 days from today.

3) FHA Tightens Guidlines, Again

With traditional bank lending severely curtailed by the economic meltdown, the Federal government has stepped into the void by making FHA (government-insured) loans the mortgage of choice for almost 50% of today's first-time buyers. Overall, FHA market share is close to 40%, when as recently as four years ago FHA accounted for less than 5% of the overall market.

Why are banks not lending? Their fingers have been burned, badly, and they simply won't touch anything with risk. But because ours is a credit-based economy, which will essentially collapse without the availability and free flow of credit, the government took extraordinary steps to keep lending via the FHA program.

Now the bad news... with all the risk FHA has taken on by making loans when no one else would, regulators are demanding that FHA tighten up its operations. This week FHA announced that, starting in April, it would be increasing the "up front" mortgage insurance premium (a surcharge tacked on to the base loan amount) from 1.75% to 2.25%, and increasing the annual mortgage insurance premium (which creates the reserves FHA uses to cover bad loans) from .50% to .55%. On a $200,000 loan, these new changes will cost borrowers more than $1,000 in additional costs.

In short, it's going to become more expensive to purchase a home, both through higher fees and costs plus the pain of higher rates. The problem with a higher rate mortgage is that it makes home ownership more expensive in perpetuity, or at least until you pay off your loan. The low rate environment we have been in is a gift to today's homebuyers, but the party is likely nearing an end.

Taking these things together, we're three months away from higher rates and higher FHA costs at the same time the tax credit is taken off the table.

Don't wait until March or April to compete with thousands of other buyers - commit and get serious about your search RIGHT NOW!

THE HIGH END OF THE MARKET AS A "TICKING TIME BOMB"

Interesting post this morning on John Rebchook's real estate blog site, but it validates a theme that's been running through my posts for the last 18 months. The high end of the market in Denver (above $750k in Rebchook's article, above $600k in my world view) is crashing, while the low end (below $250k) is surging.

Rebchook's article, like my post on December 30, points out that while the Case-Shiller national index ranks Denver as the top performing market in the country (based on the index's projection of a year-over-year value loss of 0.1%), the reality is that many sub-$200k single family homes have seen increases in value of up to 10% (or more) in the past year. It's only the dismal performance at the higher price points which drags the overall market assessment down.

Some argue that the tax credits are the primary driver in the entry-level demand, but I don't think it's that simple. It's a combination of the tax credit, incredibly low interest rates, values that already adjusted downward, and the continual pressure that always exists on the entry-level as the population grows. You must also keep in mind that new construction, which was everywhere during the first years of this decade, has vaporized from the landscape.

I think the lower end of the market is simply being revalued (upward), based on demographics and the perception of value that exists there. At the same time, the high end of the market is also being revalued (downward), based on the lousy economy and the fact that financing is so hard to get. Much of the construction boom was fueled by easy financing... and so the "value bubble" was also based on easy financing.

Until credit becomes more accessible, there simply aren't enough qualified buyers (by today's standards) at the high end of the market to absorb the glut of homes we see today. And that spells continued deterioration at the high end, with continued upward pressure on those homes that are at more affordable price points.

HUD LOOSENS UP ON FLIPPING RULES

One controversial rule regarding FHA financing - the one which states that FHA won't finance any home that hasn't been "seasoned" at least 90 days since its last ownership change - is being suspended by HUD until February 1, 2011.

The "No Flipping" rule, as it has been called, was intended to restrict FHA's exposure to flips, homes that are purchased out of foreclosure at steep discounts by investors, patched up, and then resold at a retail price.

For the past 18 months, flippers have been making big profits on the resales of distressed homes, as the $8,000 first-time buyer tax credit flooded the market with entry-level buyers who didn't want to do a lot of work. Since so many first-time buyers were (and are) using FHA financing, the "no flipping" rule caused complications for many buyers who did not know they would have to wait 90 days before submitting a contract on a flipped home.

But it also caused investors to be a little more deliberate in preparing these homes for sale, and encouraged a more thorough rehab before the home was re-listed on the market.

The new rule change will eliminate that waiting period. And so it will encourage more flipping.

With the current first-time buyer tax credit set to expire April 30, our market figures to stay very hot at the entry level for the next 90 days.

I have looked at hundreds of flips over the past few years... some done well, and some that were terrible. With any flip, a thorough, comprehensive home inspection is totally critical. As is a sewer scope, a furnace check-up and a roof certification.

Rule of thumb on flips: if the stuff you can see isn't done well, then you know the stuff you can't see is even worse.

While many flips look pretty, be very careful with them. And now that HUD is relaxing its "No Flipping" rule, there's even more reason to be cautious as many investors look to make a quick buck before the tax credit goes away.