Thursday, August 26, 2010

And the Good News Just Keeps on Coming...

On the heels of a dismal existing home sales report on Tuesday, Wednesday saw a dismal new home sales report. The National Association of Realtors is reporting that sales of new homes have hit a historic low of 276,000 for the month of July. That is the lowest number of recorded sales since record-keeping began in 1963. At the same time, housing prices have fallen to the lowest levels in 7 years--the median price for a single family home is now $204,000 which is the lowest since 2003.

This is bad news not only for real estate but for the construction industry as well, and it is also bad news for the job market as real estate and construction have been steady employers for the last 10 years or so. As new home sales continue to drop, we are going to see more builders closing their doors, which is going to lead to more bankruptcies and layoffs and general economic problems.

It also bad news for my industry. According to the NAR report, mortgage purchase applications are currently at the lowest levels in 13 years while mortgage interest rates are the lowest levels in 20 years. Eighty-two percent of mortgage applications are for refinances.

Of course these are national averages. In my city, El Paso, Texas, the local news is reporting that our sales of existing homes have actually dropped 44% between June and July as opposed to 27% which is the national average. That really is shocking because we have never had huge appreciation in our market and as a result we never had to deal with huge depreciation either. Our values were stable, and we counted on the influx of buyers from Mexico and the influx of troops from Fort Bliss, Texas to keep us afloat no matter what was going on nationally. So a 44% drop is astounding.

In response to all of this bad news, CNBC posted a story that the Fed is looking at resuming its program to purchase treasury notes in order to further drive down mortgage interest rates to spark some activity. (The Federal Reserve was holding rates down through March of 2010 with a program to purchase mortgage backed securities. When the Fed's intervention ended in March, all of us expected interest rates to rise, so the interest rate drop this summer was an unexpected gift.) But with 10 and 15 year fixed rates currently at 3.875% and below, I do not see how further lowering interest rates is going to do anything but help the same set of borrowers with great credit and income who have been refinancing for the past two years free up a little more cash.

Don't misunderstand--I am thrilled that the rates are low. It is exciting to see borrowers actually save hundreds of dollars per month and lower their already low interest rates by 1% or more. Last year when I was refinancing borrowers, I thought I had seen the lowest rates I ever would. But I do believe that there is a point when just continuing to lower interest rates is a wasted exercise. If borrowers are not going to buy houses when the thirty year rate is under 4.5%, will they be more motivated if the thirty year rate is under 3.5%? I don't think so.

I believe that the real problem is the inability of borrowers to qualify under the strict underwriting guidelines. Put simply, nobody likes rejection. Many people will really avoid situations where they feel embarrassed, and for many potential homebuyers, being denied for a loan is a potentially embarrassing situation. Borrowers do not want to apply for a loan there is a good chance they are not going to get.

On top of that, the paperwork is so huge and the requirements are so exacting that many borrowers lose patience during the process. Many people do not like signing hundreds of pages of forms they do not understand both during the application process and at closing. I received a closing package today that was 147 pages! There were so many documents that the attorneys who prepared it finally just sent an additional loan package to make sure that title had everything they needed. Borrowers are discouraged by high costs, delays, and stacks of paperwork, and they don't want to go through all of the headaches to be told, "I am sorry, but at the end we just could not get you into this home."

If we want to get the economy moving in the right direction again, we have to loosen up access to credit. If mortgage guidelines were relaxed, more borrowers would qualify, which would induce more borrowers to apply. As they purchased homes, the builders would start selling homes, the sellers who are waiting to sell their own homes before they can purchase new homes would now be able to buy homes, etc. Before long, builders and the real estate community might be able to actually hire some help, which would put Americans back to work. Those new hires would then have some money to spend at their local retailer, and before long he or she could hire some help,too. And then, those new hires would have some money to spend. But the entire process begins with access to credit.

I realize that the justification for making credit guidelines so tight is that we do not want the kinds of problems we saw two years ago in the credit markets. Lending money is by its very nature risky--there is always a possibility that for one reason or another the person you loan to will not pay you back. The only loan that is 100% risk free is the one that never gets made in the first place. So rather than rushing to buy treasury notes to drive rates down, why not try loosening up lending guidelines and circulating some money in the form of mortgage loans with reasonable interest rates. Since Fannie Mae and Freddie Mac are both controlled by the government, this would be easy to do and it might pay off for the whole country!

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