Tuesday, August 24, 2010

Recovery Summer is Coming to a Close

The big story today in the world of mortgages and real estate lending is the National Association of Realtors' survey which shows that sales of existing homes have dropped 27.2% from June of 2010 to July of 2010 and have hit the lowest level for single family home sales in 15 years. According to the Washington Post, this is the biggest one month drop on record since 1968. The Post quotes economist Paul Dales, "The housing market is undermining the already faltering wider economic recovery. With the increasingly inevitable double-dip in prices yet to come, things could yet get a lot worse."

Of course, sales have been slow since the homebuyer tax credit ended on April 30, 2010. Up until that time, borrowers were putting in contracts to qualify for the tax credit. But the timing of the credit expiration seemed to be designed to carry the real estate market into summer, since the period between Memorial Day and Labor Day is the time when families with children traditionally purchase new homes and move. Now, with Labor Day less than 2 weeks away, the NAR report takes on special significance for sellers hoping to unload their homes before this prime window of opportunity closes.

The irony is that the White House dubbed the summer of 2010 "Recovery Summer" and sent members of the administration on a good will tour to explain to Americans how things really are getting better. But the slumping home sales are a clear sign that for many buyers, sellers and real estate and mortgage professionals, there is no recovery to celebrate.

I particularly appreciate Dales' comment, "The housing market is undermining the already faltering wider economic recovery," as if housing professionals are purposely sabotaging overall efforts at economic growth. Even though this summer has seen some of the lowest mortgage rates in the history of records, the facts are that many homebuyers cannot qualify because of strict lending standards. The regulations which were supposed to make the housing markets safer have shut out so many borrowers that the entire real estate market is suffering.

The Post also cites a disconnect between buyers and sellers over the price of homes. "One reason the market is hurting is that buyers and sellers are in a standoff over prices. Many sellers are reluctant to lower their prices. And buyers are hesitating because they think home prices haven't bottomed out." Certainly, a lot of buyers have been influenced by internet stories of great houses being sold for pennies. But the reality is that every time that sellers lower their prices in desperation, they actually reduce the sales price of their entire neighborhood--not just their own home. If you have your home listed for $250,000 and the neighbor with a house the same size as yours on the same street just sold his for $200,000 last week, yours is probably not going to appraise, which means that you also will probably have to sell yours for $200,000. And when that happens on large scale, the entire city is affected and goes on a "declining markets" list which affects the financing that every borrower in that city can get. So even if your specific house is worth $250,000, if your city is deemed a "declining market" the buyer may need more downpayment which could keep him from qualifying. Reducing the housing prices is a vicious cycle--the lower they go, the worse financing actually gets until eventually the market does bottom out.

On top of that, we are starting to see news media reports encouraging people to rent rather than buy. With credit qualifying standards so tight, and values uncertain, many potential buyers are being encouraged to just simply rent their homes, which leads to fewer sales.

After September 11, the real estate market helped to get the economy rolling again. Low interest rates allowed borrowers to refinance into cheaper payments and to purchase new homes. The money that they cashed out from equity loans went back into the economy as purchases. Today we have some of the lowest interest rates ever, but the borrowers who could qualify for them have already refinanced their homes over the past few years, and the borrowers who could really benefit from them do not qualify.

A lot of people who would be buying houses this summer are hampered by the fact that they need to sell their own home and cannot. Tight new rules from Fannie Mae and Freddie Mac require that these sellers either prove through an appraisal that they have 30% equity in their homes or qualify with both payments and in some cases enough savings to cover six months' worth of house payments on the home they cannot sell. Very few borrowers can do that, and so they sit and wait for a buyer to come along to buy their old house before they can get a new one.

If the Treasury Department and the White House really want to salvage the rest of the summer and spark a real recovery, maybe they need to ease up on credit restrictions which are choking the life out the real estate market. Since taxpayers will probably spend around one trillion dollars when the final tally for Fannie and Freddie bailouts is totaled, maybe some of that money could be spent rewriting guidelines to make sense. If credit started flowing again and houses began to buy and sell, we might see the beginning of a recovery after all.

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