When the housing bubble burst in 2006, the cost of buying a house was considerably higher than renting that same house in most areas. Today, the opposite is true in many states, particularly those hit hardest in the housing crash—namely Arizona, California, Florida and Nevada and right behind them, Illinois, New York and New Jersey.

Rental cost has remained on the high side in many communities within these states, making it more monetarily advantageous for renters to buy a home that has dropped in value from the highs of five years ago, to the tune of the national average of 30%. Combine the decrease in home prices, high rental costs and historically low interest rates, and the time may be ideal for renters to consider buying.

To further underscore the advantages to buying, consider a recent study by Deutsche Bank that reported the share of income Americans are now paying to own their homes is 9.8% after mortgage, taxes and insurance payments—down from 17.2% at the housing bubble’s peak. Conversely, the study further says that in 28 out of the country’s 54 major markets, it’s now less expensive to pay a mortgage and other major housing costs than to rent the same house.

For those on the fence when it comes to buying or renting, conducting an analysis is not difficult. Start with the total cost to rent a home or apartment—”total” means not only the rent, but any related cost such as tenant’s insurance, and maintenance and/or association dues. Use that number as a starting point or base for comparison.

The next step is to determine the cost of buying comparable housing; for this a little research is necessary. Look at the houses for sale in your price range and find out the price similar homes have been selling for recently. A local REALTOR® can help in this regard. Once the price of the home has been determined, ask the REALTOR® what you can expect in the way of real estate taxes, utilities and insurance cost for a home at this price.

Lastly, talk to a local bank or mortgage broker to ascertain the availability and cost of the mortgage needed to buy the home.

Ultimately, real estate is local in nature. National, regional and municipal markets are all “macro markets” comprised of thousands of micro markets specifically made up of communities, neighborhoods and price ranges, where market conditions can vary significantly from the macro markets in which they exist. Even in distressed market areas, healthy micro markets do exist.

HouseSavvy helps home buyers and sellers save time and money by analyzing current real estate market conditions and helping them develop a winning plan and strategy before they start the process.

Investors seeking to buy and then rent foreclosed properties from Fannie Mae and Freddie Mac have raised at least $2 billion in the last six weeks, according to housing analysts at Morgan Stanley.

Private investors are “continuing to gear up for what is perceived to be both a massive and long-term investment opportunity,” Morgan analysts write in a new report.

Fannie soon will conduct its first bulk sale of REO and non-performing loans under a new pilot program. The first sales will feature assets located in the hardest-hit areas, according to the Federal Housing Finance Agency.

As of Sept. 30 Fannie owned 34,400 REO units in Arizona, California, Florida and Nevada. It also controls 28,300 foreclosed properties in four hard-hit Midwest states.

“The first transaction will be announced in the near-term,” FHFA said in a recent press release.

Morgan Stanley analysts note that FHFA so far has provided “very few details” about the pilot program, which will require buyers to rent and manage REO properties for up to three years. “That said, we are pleased that the government is taking careful consideration when designing this program given the importance we believe it holds for the future success” of the bulk purchase of Buy-to-Rent inventory, the analysts write.

Morgan believes the government program will set the foundation for the buy-to-rent concept to take off and eventually lead to the rehabilitation of 4 million homes and create 1 million jobs.

Such positions might involve temporary construction jobs as well as more permanent property management, leasing and maintenance posts.

“With the added benefit of the potential for significant private sector-led job creation, in the hardest-hit sectors in the hardest hit regions, we are increasingly confident that Buy-to-Rent can have a positive impact on housing and the macro economy as a whole,” the Morgan Stanley report says.

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That may sound counter-intuitive, given that we always talk about how distressed sales deflate comparable home prices.

My reasoning is that foreclosures are in high demand right now, and organic, non-distressed sellers are still not coming back to the market. Without the foreclosures, there really is no competitive market.

I hate to say, “I told you so,” but … today the National Association of Realtors reported that inventories of homes for sale in January fell to 2.31 million,the lowest supply since March, 2005. Rather than pushing home prices higher, they are still down, 2 percent, from a year ago.

The Realtors noted that 35 percent of all home sales were distressed (either foreclosures or short sales). Investor demand is high, they say, even claiming that a recent program initiated to sell the foreclosures of Fannie Mae andFreddie Mac in bulk to investors is unnecessary.

“Based on the swiftness of how REO (bank-owned) properties are moving in the market, it may not be needed,” said NAR chief economist Lawrence Yun. He did admit that such a program would also take away thousands of potential listings from Realtors.

Banks are ramping up the repossessions, as the so-called “Robo-signing” foreclosure paperwork scandal is fading and a settlement with federal and state governments has been reached. But they are not going to flood the market with these properties, for fear of losing pricing power. That’s why we are now starting to see bidding wars in some of the hottest distressed markets.

Sales of existing homes in the West, which comprise the hardest hit states of Arizona, Nevada and California, jumped 8 percent in January month to month. More than half of sales out West are foreclosures and short sales. Demand is definitely rising, but only on the lower end.

If you look at sales distribution by price, 69.9 percent of homes sold in November were under $250,000. That moved up to 72.2 percent in January. Given that there is just a two month difference, seasonality, i.e, higher priced homes selling at different times of year, doesn’t apply.

As I wrote last week, organic, non-distressed sellers are making up less and less of the overall housing market. That does not a healthy housing market make. Without good, move-up homes available, the market cannot see real price appreciation.

“The main limit on sales volume now is willing sellers, not willing buyers,” says Glenn Kelman, CEO of Redfin, a real-estate brokerage.

Feb 21 2012, 1:59PM

The Federal Housing Finance Agency (FHFA) said Tuesday that, with its conservatorship of Fannie Mae and Freddie Mac (the Enterprises) now in operation for more than three years “and no near-term resolution in sight,” it was time to assess its goals and directions.  In a letter submitted to the chairs and ranking members of the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs, Acting FHFA Director Edward J. DeMarco set out a Strategic Plan for Fannie Mae and Freddie Mac Conservatorships with three goals:

1. Build a new infrastructure for the secondary mortgage market;
2. Gradually contract the Enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations;
3. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.

DeMarco said in moving forward FHFA has to consider that:

• The Enterprises’ losses are of such magnitude that they will not be able to repay taxpayers in any foreseeable scenario;
• The operational infrastructures of each are working but require substantial investment to support future business which presents an issue of whether to rebuild or start anew;
• Minimizing taxpayer losses, ensuring market liquidity and stability requires preserving the Enterprises as working entities but this requires some things such as retaining private sector pay comparability that have generated concern because of taxpayer involvement;
• Although the housing finance system cannot be called healthy it is stable and functioning, albeit with substantial government support;
• Congress and the Administration have not reached consensus on how to resolve the conservators and define a path forward.

The absence of any existing meaningful secondary mortgage market mechanisms beyond the Enterprises and Ginnie Mae is a dilemma for policymakers who want to replace them and was a key motivation for conservatorship in the first place.  The elements for rebuilding the system are already known and work can begin without knowing whether there will be a government guarantee other than through FHA.  A secondary market structure without the Enterprises would likely include:

• A framework to connect capital markets to investors to homeowners – i.e. a securitization platform that bundles mortgages and provides support to process and track payments from borrowers through to investors.
• A standardized pooling and servicing agreement that corrects the many shortcomings in the agreements used in the private-label mortgage-backed securities (MBS) market pre-housing crisis.
• Transparent servicing requirements that set forth servicers responsibilities to investors and borrowers.
• A servicing compensation structure that promotes competition rather than concentration of servicing, takes into account servicers’ costs and requirements, and considers the appropriate interaction between origination and servicing revenue;
• Detailed, timely and reliable loan-level data for investors that is maintained through the life of the MBS.
• A sound, efficient system for document custody and electronic registration that respects local property laws and enhances the liquidity of mortgages.
• An open architecture for all these elements to facilitate entry to and exit from the marketplace and an ability to adapt to emerging technologies and legal requirements over time.

Since entering conservatorship the Enterprises have guaranteed roughly 75 percent of the mortgages originated in the U.S. with FHA guaranteeing most of the rest.  Shifting mortgage credit risk away from the Enterprises to private investors could be accomplished in several ways.  The following are either under consideration or actively being implemented.

• Increase guarantee fee pricing. In September, 2011 FHFA announced its intention to continue a path of gradual prices increases based on risk and the cost of capital. In December Congress directed it to increase guarantee fees by at least 10 basis points as part of the revenue raising aspects of the Temporary Payroll Tax Cut Continuation Act and Congress also encouraged FHFA to require guarantee fee changes that reduce cross-subsidization of relatively risky loans and eliminate differences in fees across lenders not clearly based on cost or risk.
• Various approaches, including senior-subordinated security structures that could result in private investors bearing some or all of the credit risk.
• Expand reliance on mortgage insurance through deeper mortgage insurance coverage on individual loans or through pool-level insurance policies that would insure a portion of the credit risk currently retained by the Enterprises.

The Enterprises do not dominate the multi-family credit guarantee business and approach it very differently from their single-family business.  For a significant portion, Fannie Mae shares risk with loan originations and for a significant and growing part Freddie Mac shares credit risk with investors through securities.  Given these conditions, generating potential value for taxpayers and contracting the multifamily market footprint should be approached differently and each Enterprise will undertake a market analysis of its operations.

Capital market activities have long been considered the Enterprises’ source of greatest profits, controversy, and risk.  These have been used to fund the retained portfolios and is a complex business activity requiring specialized and expert risk managers.  This business line is already on a gradual wind-down path with the Treasuring requiring a 10 percent reduction in the retained portfolio each year.  New mortgages are primarily delinquent ones removed from MBS and other legacy assets have little liquidity.  Over time the retained portfolios are becoming smaller but also less liquid.

Maximizing taxpayer value on these assets is a key consideration and there is argument for holding some for a longer period.  This in turn requires management, either by retaining in-house expertise or by contracting to a third party.  The first is less disruptive but requires human capital risk which increases with the proposed legislation on Enterprise compensation.  The second would hasten the shrinkage in Enterprise personnel but would be more costly and would pose new control and oversight issues for FHFA.

The third strategic goal is maintaining foreclosure prevention efforts and credit availability.  The Enterprises must continue and enhance:

• Successful implementation of the Home Affordable Refinance Program (HARP) along with the program changes announced last October.
• Continued implementation of the Servicing Alignment Initiative including its approach to loss mitigation through loan modifications and early outreach to distressed borrowers;
• Renewed focus on short sales, deeds-in-lieu, and deeds-for-lease options;
• Further development and implementation of the REO disposition initiatives announced by FHFA last year including efforts to convert properties into rental units.

The Enterprises almost need to resolve other long-standing concerns in the marketplace that may be suppressing a more robust recovery and limited credit.  One major issue is concerns over representations and warrantees.  These policies must be made more transparent and conditions for their implementation defined.

In accomplishing the three goals, there must be consideration of human capital as well.  The boards and executives responsible for the business decisions that led to conservatorship are long gone and shareholders of the Enterprises have effectively lost their investments. The public interest is best served by ensuring that the Enterprises have the best possible leaders to carry out the work and a search is underway for new CEOs for each company and other executives willing to take on the necessary challenges in the face of ongoing criticism of the companies and uncertain legislative environment.  FHFA and the Enterprise boards have taken seriously the Congressional criticism of compensation structure and are working to create new ones that will be all salary with the largest portion deferred and at-risk.

Hoping there are big profits to be made in the aftermath of California’s housing collapse, professional investors are flocking to the business of buying foreclosed homes at distressed prices.

The investors, primarily private equity funds and groups of wealthy individuals, purchase the homes at public auctions, which are held daily on the steps of local courthouses. They refurbish the properties and try to sell them for quick profits.

Not long ago, the typical home flipper was an amateur tapping a home equity line or savings for an investment property. But professionals have rushed in, partly because of sparse investment opportunities elsewhere.

“In crisis there’s opportunity,” said Rick Hudson, president of investment firm Prosperity Group Real Estate in Irvine. “Right now there’s huge opportunity with flipping houses.”

Closely watched gauges of professional buying have surged over the last two years.

The number of homes sold at foreclosure auctions statewide increased to 4,336 in April, from 884 in January 2009, according to research firm ForeclosureRadar. It eased back to 3,483 in July as banks offered fewer properties for sale. The auctions are dominated by professional investors who shop with cash (although not usually with actual greenbacks, for practical reasons).

Another measure, the percentage of all homes sold to absentee buyers, paints a similar picture. In the hard-hit Inland Empire, for instance, 30% of all homes sold in April went to absentee buyers — up from 19% at the end of 2008 and the highest level in at least seven years, according to San Diego research firm MDA DataQuick. It was at 28.2% in July.

The binge of professional buying has helped spark a nascent housing recovery in Southern California because investors have cut significantly into the glut of foreclosed properties after the subprime mortgage meltdown.

Home sales in the six-county region rose 7.2% in June from May and 2.6% from a year earlier, according to MDA DataQuick. In July, overall sales tumbled primarily because of the expiration of federal tax credits, falling 20.6% from the month before in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties. But the region’s median home price of $295,000 was off only 1.7% from June.

The fragile rebound in the broader market contrasts with the behind-the-scenes scramble at foreclosure auctions.

“There’s a tremendous amount of capital that is desperate to just buy anything right now,” said Gil Priel, principal of a real estate investment firm in Woodland Hills.

In some cases, well-financed newcomers are elbowing out smaller investors at auction sales.

“The people who want to go and buy a house to flip, and do one or two, are already exiting the market,” said Jan Brzeski, who manages a residential investment fund at Standard Capital in Los Angeles.

The swarm of new investors, however, is making a treacherous and labor-intensive business even tougher.

Investors must do their homework on dozens of homes for every one they buy. Legal and other impediments usually prevent them from going into homes prior to buying them, leaving no way to gauge repair costs. And despite being foreclosed on, the original owners often still live in the houses. That forces buyers to pay them to leave, a dynamic known as cash-for-keys.

The influx of new players is pushing up auction prices and squeezing profits. The average discount at auctions — the difference between a home’s sale price and its actual value — is 21.6%, down from 28% in January 2009, according to ForeclosureRadar.

Last year, Chase Merritt, a Newport Beach private equity fund management firm, notched strong returns from auction sales, said Chad Horning, its chief executive. Chase Merritt bought a property in Costa Mesa in June 2009 for $315,500 and sold it 21/2 months later for $470,000. It bought a Mission Viejo home for $305,371 and sold it within two months for $375,000.

Chase Merritt launched its first foreclosure fund in May 2009 and has started two more funds since then. But “it’s literally gone from a business that’s very attractive, even lucrative, 12 to 18 months ago to something that almost doesn’t make sense,” Horning said.

“It’s just like the housing bubble,” he said. “It’s almost like we’re in a bubble at the courthouse steps.”

The scramble was on display recently at an auction at the Norwalk courthouse.

A semicircle of people crowded around auctioneer Elwood Brown. Most were clad in cargo shorts and flip-flops. A few sat in lawn chairs. But their laptops and cellphones, as well as the thousands of dollars’ worth of cashier’s checks they clutched, marked them as professional investors girding for battle.

Brown took a swig from his oversized water bottle and announced that bidding for a four-bedroom duplex in Hawthorne would start at $179,598.60.

The price shot up within seconds as two men and a woman raised one another’s bids in $1,000 increments.

“It’s at 229, Daryl,” a man in a polo shirt and sunglasses whispered intently into his cellphone. “About to close. Do you want it?”

He increased his offer, but a rival bidder claimed the home a few seconds later for $237,000.

Competition at the auctions is brutal, said Bruce Norris of Norris Group, a real estate investment firm in Riverside.

Norris unwittingly bought a house that was the site of a gruesome double murder. No one else bid — a rare occurrence that showed others knew the history — leaving Norris with less cash to bid for other houses.

“It’s a very lonely place out there,” Norris said.

That’s only one of many risks in the foreclosure business. People who’ve lost their homes through foreclosure sometimes vent their anger by smashing walls, knocking over water heaters or ripping out toilets.

“We’ve literally had people take $20,000 of cabinetry out and feel perfectly justified doing it,” Norris said.

The daily auction ritual begins each morning when banks signal which homes they are likely to dispose of that day. That sets off an early-hours scramble as would-be buyers speed through suburban neighborhoods to investigate the homes.

On a recent day, Norris steered his sport utility vehicle into the driveway of a 3,300-square-foot McMansion on a corner lot in Moreno Valley. The front lawn was brown and the backyard was littered with garbage. But the windows were intact and there was no visible damage — far better than many foreclosures.

Aiming for an all-important look inside, Norris rang the doorbell and delivered the bad news to the teenage boy who answered the door that the home was scheduled to be sold that day.

“Do you mind if I poke around a little bit to see what kind of condition it’s in?” Norris asked, angling his body to get a glimpse of the living room.

Then another car sped up and a rival buyer hurried up the driveway. She studied the house for a few seconds and craned her neck over the wooden fence protecting the backyard.

“This is a dream compared to a lot of them,” she said in a satisfied tone as she rushed back to her car.

In the end, no one bought the home. The sale was delayed after the owner filed for bankruptcy protection.

Norris was philosophical, knowing that there were plenty more foreclosures.

“If you miss one,” he said, “oh well, tomorrow’s another pile.”

walter.hamilton@latimes.com alejandro.lazo@latimes.com