Home prices show signs of topping out

Home prices are showing signs of topping out: The S&P/Case-Shiller index posted its first month-over-month decline in 10 months on Tuesday.

The annual measure of home prices still increased 13.7% in November, but that was only narrowly better than the rise posted in October.

The housing recovery was one of the stronger aspects of the economy last year, boosting household wealthand home construction.

But with mortgage rates climbing steadily since hittingrecord lows in May, it's clear the housing recovery is starting to lose some steam.

"While housing will make further contributions to the economy in 2014, the pace of price gains is likely to slow during the year," said David Blitzer, chairman of the index committee at S&P Dow Jones Indices.

Calculator: How much house can you afford?

But housing experts say that more modest price increases are probably a good thing for the housing market. The rapid increases of the last year are not sustainable, they said.

"Sellers used to seeing huge price gains month after month may feel some whiplash as that slows down," said Stan Humphries, chief economist for sales tracker Zillow. But more modest price increases mean "the housing market is still a long way from normal, but it's getting there."

The Case-Shiller index chronicles prices across the nation's 20 largest metropolitan areas. Fourteen of those markets posted double-digit percentage gains over the last year, but only nine posted any month-over-month gain.

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The improvement in housing was driven by pent-up demand for home purchases, combined with lower unemployment and a drop in foreclosures. Mortgage rates have been climbing steadily of late but remain low by historical standards, making housing prices far more affordable than they were at the height of the bubble last decade.

National prices are still nearly 20% below peak levels reached in mid-2006, according to Case-Shiller. 

U.S. postpones 2014 hike in mortgage fees

New housing finance chief Mel Watt says he will postpone fee increases set for April.

It's a Christmas miracle! Planned fee increases that would have added to the cost of millions of mortgages will be postponed.

Currently, borrowers seeking loans backed by Fannie Mae and Freddie Mac are set to pay higher upfront fees starting April 1.

The fees, ordered by the Federal Housing Finance Agency earlier this month, are meant to help safeguard banks against risky borrowers who might default.

But housing experts say they will add thousands of dollars to the cost of all mortgages insured by Fannie and Freddie, with the biggest hits taken by borrowers with less than perfect credit histories.

On Friday, the incoming chief of the FHFA, Mel Watt, said he intends to postpone the fees -- and perhaps even cancel them -- until more analysis is done. The FHFA oversees Fannie Mae and Freddie Mac.

Watt, a former Democratic member of Congress, has been confirmed to his post by the Senate and takes office on January 6.

In a statement, Watt said he intends to "evaluate fully the rationale" for the fees and their impact on Fannie and Freddie and the "availability of credit."

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The mortgage industry has been bracing for substantial increases in the price of loans in 2014.

"If these [policies] had been implemented, it would have increased borrowing costs dramatically," said David Stevens, CEO of the Mortgage Bankers Association.

The hit for individual borrowers would depend on the amount of the home purchase being financed, according to Brian Koss, executive vice president at Massachusetts-based lender Mortgage Network.

Borrowers would have paid a fee when they took out the loan, or they could have effectively rolled the higher fees into their interest rate, raising monthly mortgage payments by as much as a quarter percentage point.

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Even with the reversal, however, mortgages will probably get more expensive over the next few months anyway as the Federal Reserve cuts back on its purchases of mortgage backed securities, a program designed to keep interest rates low.

Stevens, the mortgage industry representative, said the proposed increases made little sense. Defaults on mortgages made in recent years have been much lower than on those made before the housing crash.

As a result, Fannie and Freddie are flush with profits, so much so that they have already returned almost all of their $187 billion taxpayer-funded bailout.

"The GSEs are making a lot of money," said Stevens. "There's no rationale for the increases." 

Real estate: Look for value in 2014

NEW YORK (Money Magazine)

In Money magazine's Make More in 2014, you'll find next year's economic outlook, where to find opportunities in stocks and bonds, the best moves for homebuyers, sellers and owners, and strategies for boosting your career. This installment: How to play the housing market.

The good news for housing is that price gains next year are expected to be only about half as strong as in 2013, when sellers stayed on the sidelines. Yes, that's good news. "For a sustainable recovery you want to see more balance between buyers and sellers," says David Stiff, chief economist at CoreLogic Case-Shiller, which is forecasting a 6.8% rise in the median home value for 2014.

Inventory is already improving. Nationwide, the number of homes for sale in September rose 1.8% vs. a year earlier, according to the National Association of Realtors. That's the first increase since late 2011. In Los Angeles, Atlanta, and Orlando, inventory was 10% or higher than a year earlier.

"It will still be a sellers' market in 2014, given how far we have before inventory is back to normal," says Jed Kolko, chief economist at Trulia, noting the supply of homes in September was still about 15% below historical norms. "But it will not be as extreme as 2013," he says.

Buyers will also enjoy an advantage next year as real estate investors are expected to be less of a factor. Why? In an improving market, there are fewer distressed homes, which they covet. According to the Campbell/Inside Mortgage Finance HousingPulse Tracking survey, the investor share of residential home purchases fell from 23% earlier this year to 17% in September. In a more balanced market like this, here's what you can do to get an edge:

BUYERS

Waiting for more inventory can make sense if you have a dream home in mind. But in 2014 there will be a price for delay -- 30-year fixed-rate mortgages are forecast to climb from today's 4.5% to more than 5%.

Work with a fast closer. Qualifying for loans is easier now, but speed is another issue. Franklin, Tenn., agent Patty Latham says she will not work with buyers using a particular lender that has missed several deadlines. For speed, Virginia agent Rob Wittman suggests sticking with local lenders with ties to nearby appraisers.

Related: Was my home a good investment?

What's fast? John Wheaton at Guaranteed Rate says, "Where 45 days was the norm, you can get an express closing in 20 days and even faster."

Lead with a credible offer. At a time of multiple bids, low-balling isn't the way to go. "The reality is, sellers don't have to come back to you with a counter if they've got better bids," Wittman says. Of course, you don't want to overpay either. Even in markets that are starting to experience bidding wars, such as L.A. and Boston, final sales prices are still typically about 1% below asking. Use that and your agent's local knowledge and go in with a respectable bid.

OWNERS

If you like your home and are not in a rush to sell, you have great flexibility. For instance, your rising home equity will make it easier to borrow against the property. That can help pay for deferred maintenance or home renovations you've been eyeing for years -- which will only add value when you eventually put your home on the market.

Remodel within reason. Home-improvement spending is expected to grow by double digits through mid-2014, according to Harvard's Joint Center for Housing Studies. Atop the wish list: bathroom and kitchen jobs.

Keep resale in mind. While the focus was on value at the market lows, today "homes with all the fixings are the ones attracting multiple buyers," says McLean, Va., real estate broker Jon Wolford. So, yes, you can splurge a bit, but don't go crazy. Remodeling Magazine's cost-vs.-value survey found that moderate kitchen remodels ($57,500) recouped 69% of their cost, close to what minor jobs paid back. Over-the-top projects ($111,000), though, recouped less than 60%.

Take advantage of low home-equity rates. While 30-year mortgages rose nearly a point this year, rates on home-equity lines of credit have fallen a bit to 5.1%. That's because HELOCs are tied to short-term rates that the Fed isn't likely to hike until 2015.

If you'll need to repay your loan over many years, though, go with a fixed-rate home-equity loan. Today's 6.25% average is about 0.25 points lower than a year ago, as lenders are now more interested in doing deals, says Keith Gumbinger at HSH.com. Credit unions can be the best place to shop for home-equity loans. The average credit union rate is 5.75%.

SELLERS

List too early and you'll leave gains on the table. Wait too long and rising borrowing costs might put an end to bidding wars. You can't time the market perfectly, but you can keep an eye on inventory trends. Ask your agent to give you a monthly report on the number of listings compared with closings. Housing trends play out gradually.

Once you see a big uptick in listings relative to closings, you'll know price gains are getting ready to slow -- and that it's time to act.

Related: New mortgage rules may mean less choice

Price it right the first time. Don't waste your time by listing too high only to have to wait and lower the price. "Buyers are smart these days -- they know where the market is, and now that rates are higher, they aren't going to bite on a list price above recent comparables," says Sara Fischer, an agent with Redfin based in San Diego. The real estate site Zillow reports that about one-third of listed homes in August had a price drop, up from 26% earlier this year.

Play tour guide for the appraiser. If your buyer's lender gets an appraisal that comes in lower than the agreed-upon price, you're in for plenty of headaches -- even in an improving market. You'll have to lower the price, the buyer will have to cough up a bigger down payment, or worst case, the deal might collapse, sending you back to square one.

Fischer recommends that sellers be present when appraisers come by. "They don't want to listen to the agent," she says. "But if you're the owner and can walk them through all the improvements, that can help the appraiser better understand what has gone into the home." She recommends handing the appraiser a spreadsheet of all upgrades, listing when they were done and the scope of each project.

Banks offering mortgages with only 5% down payments

Good news for homebuyers who don't have a lot of cash on hand: Banks are offering loans with down payments of just 5%.

After the housing bubble burst, buyers needed to come to the table with as much as 20% down or they had to turn to the Federal Housing Administration for a low down-payment loan.

But now banks like TD Bank, Bank of America (BAC,Fortune 500), and Wells Fargo (WFC, Fortune 500)are loosening the purse strings, offering loans with down payments that are as low as 5%.

TD Bank's "Right Step" mortgage, for example, allows borrowers to secure a loan with a 5% down payment. It also allows them to receive as much as 2% of the sale price as a gift from a relative or other third party, so they would really only need 3% down.

Why the change of heart? Market opportunity for one thing.

FHA dominated the market for low down payment loans during the housing bust. Taking on all those risky loans, however, depleted the agency's reserves and has forced it to increase costs.

Related: Money 101 Tips for buying a home

Over the past couple of years, the FHA has been raising premiums. And this year, it started requiring borrowers to buy private mortgage insurance for the life of the loan -- an expensive proposition that has sent many prospective borrowers looking elsewhere.

While the loans were far too risky for private lenders to take on before, rising home priceshave made them less of a gamble. Plus, the banks think they can offer a better deal than FHA.

"As the FHA selectively reduced market share by increasing premiums, we introduced a substitute for FHA loans," said Malcom Hollensteiner, the director of retail lending sales for TD Bank.

While the private lenders that are offering the 5%-down loans are also requiring borrowers to buy private mortgage insurance, they are only requiring them to do so until they build up 20% equity in the home.

Related: What will your monthly mortgage payment be?

The difference can really add up. Paying an insurance premium over the life of a $200,000, 30-year fixed-rate loan from FHA that carries an effective mortgage rate of 4.4% (5.75% when you tack on the insurance premium), can add up to nearly $60,000 over the life of the loan.

Of course, homeowners can always refinance to end their FHA insurance, but rates are so low that by the time an FHA borrower is able to refinance to a lower rate, it may not be worth it. 

Superstorm Sandy victims still struggling to rebuild

Josette Lata and Ed O'Kinsky

Many victims of Superstorm Sandy have still not recovered financially -- and for some, the damage will be permanent.

One major issue Sandy victims have: Their dealings with FEMA, the Federal Emergency Management Agency.

One year after the storm, Josette Lata and her husband Ed O'Kinsky have spent about $70,000 working on their property in Pine Beach, N.J.

Water damage accounted for most of the couple's costs, but their insurance covered only wind damage and provided just $3,500.

Related video: Sandy survivors mark 'year from hell'

The couple also received a $31,000 grant from FEMA. Much of that, however, went toward rent on a house where they lived while working on their property.

And the FEMA money came with strings attached, requiring them to buy flood insurancethrough the National Flood Insurance Program (NFIP). That insurance, though justifiable, could eventually cost $30,000 a year, according to Lata, a producer of photo and video shoots.

Not only that, but Lata and O'Kinsky feel that FEMA's guidance after the storm was costly.

First, the agency told them to make repairs quickly. The goal, says FEMA now, was to get people out of pricey temporary housing as soon as possible.

But then FEMA released new flood zone maps that put their home into the highest risk zone, requiring them to raise the house. Now, some of the early repairs have to be redone.

They've kept repair costs as low as possible with O'Kinsky doing much of the work himself. They also got help from volunteers with Waves for Water. O'Kinsky, a firefighter, has also helped other Sandy victims rebuild.

Related: Ravaged by Sandy but back in business

Timothy and Michelle Kelly had similar issues with FEMA, and still have not returned to their Long Beach, Long Island house.

The couple -- she's a teacher and he runs a pottery store -- got $74,000 from their flood insurance claim.

They then followed the FEMA playbook, and got going right away on repairs. They dealt with the electrical and hired a company to clean and sanitize the house.

But in January, their insurer notified them that the new flood zone risk calculations meant that they also had to raise the house. They found it was cheaper to knock it down and rebuild. The money spent on initial repairs was wasted.

"I'm glad all we did was clean the house and put in the new electricity," said Michelle.

The cost to rebuild will be around $300,000, and the couple is looking for help.

They were selected to receive donations rung up by ultra-endurance athlete Jason Lester, who ran 3,500 miles across America and raised about $20,000 for them.

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George Morafetis owns a bungalow in Staten Island, N.Y., that took on six feet of water during the storm, causing interior damage. And the weight of the surge shifted the house on its foundation.

"It's not a total loss," said Morafetis, an actor who has appeared in movies and on a couple of episodes of "Law & Order." "My framing is tight and held up pretty well."

But he also is being hit with expensive changes because of new flood insurance rules.

For example, his street is being widened to help lessen the impact of future storms, and that means he will have to chop four feet off the front of his bungalow.

But to qualify for a FEMA grant of $20,000, he will also have to raise his house. That effort brings with it costs, such as a soil sample analysis to determine whether it can support a new foundation and getting an elevation certificate to determine his insurance rate.

"I'll spend [$20,000] before I can even request the grant," he said.