Grumpy, the Housing Bear
October 12, 2011 5:14 PM
My long term outlook on housing has been consistently negative. But even the grumpiest of bears stands up to stretch his limbs. .
So, I decided to poke my nose out beyond my cozy den, and look around for signs of spring. I figured one place to start was to ask for weather reports from other professionals in the housing industry.
The question I posed to which they responded was, “What do you think the main problems in housing are, and what ideas do you have to help thehousing market get out of its current malaise?”
Some of the comments are reported below.
(From Alex Charfen, A regular CNBC TV Contributor and CEO of Certified Distressed Property Experts from Austin, Texas.)
The biggest problem in housing right now is that we are still dealing with the issues from the boom and too many people want to somehow find a magic bullet or program to fix everything. There is no such program and while in many cases the programs that have been launched are working we need to allow this financial process to run it’s course.
The continued call for stimulus or a jump start from concerned is troublesome since many interventions have caused market anomalies or confusion. Also the continued pressure to “provide a solution for the housing market” is tantamount to providing a single solution to the health care crisis – there isn’t one. It is a series of rational financial decisions that will eventually return us to a rational housing market. The perception that a healthy market is a return to 2004 to 2007 is a dangerous one, we have seen first hand just how unhealthy and unstable that market was.
Little by little housing is coming back and housing is more affordable that it has been in many consumers’ lifetimes. If we can cure the perception that housing is somehow damaged we will see a return to primary home purchases, we are already seeing the return of both domestic and international investors. In some markets this is actually driving a inventory shortage.
In summary, we are in a saw-tooth recovery and we will see housing indices go up and down at monthly or quarterly intervals for the foreseeable future. This is predictable, as inventories swell prices go down and sales in crease as inventories constrict the opposite happens. The challenge is that each fluctuation is seen by the media as either a recovery or a (double, triple or quadruple) dip. The housing market traditionally runs in 7 to 12 year cycles yet we are in a 7 to 12 minute media cycle.
The perception that housing is erratic is driving those that should and could own a home away and providing investors with a major opportunity. An educated consumer today is one that is purchasing if they can. Reality is housing has slowed but the demise of the industry is a gross exaggeration. Existing home sales have consistently been between 4.5M and 5.2M as reported by NAR. This is a dramatic fall off from the boom years but then again it should be.
(From Sue Bonfitto Rossi, Broker and owner of RE/MAX 2000 From Crete, Illinois.)
The elephant in the room is demographics. Specifically, we have an imbalance of population distribution by age in this country. The reason that’s the problem is that people buy and sell real estate differently based on their age. As a person gets older, the likelihood of them selling increases & the likelihood of them buying decreases.
Since we have more older people than younger people with an aging Baby Boom, there are far too many people in their 50’s & 60’s who want or need to sell for the smaller number of younger people to absorb. Since oversupply of inventory is the root cause of falling prices & rising foreclosures, the oversupply of inventory is what needs to be addressed. The way to address this is to figure out how to get an increased rate of absorption by each first time buyer, and the solution to that problem is to bring back the first time buyer tax credit with a limitation that they have to buy from a private party in order get the money.
This will reintroduce demand at the bottom of the market, allowing homeowners to achieve a sale so they can trade up & buy from someone else who can then build a new home and the builder can hire labor. The increased overall demand will stabilize prices which will reduce the number of people upside down and needing a short sale, will reduce the number of future foreclosures, will stimulate the trade-up cycle and free up equity which then goes into the economy, will stimulate new construction which will create jobs and will allow a hopeful retiree to achieve a sale which creates yet another job in the workforce
(From Greg Wakeham, Broker Associate at Re/Max Premier Realty Irvine, California)
Problem: The biggest problem with the real estate market is that the “market” as a whole is generally not going after the “occupying buyer”. Between grueling lending processes and homes with less desirable conditions, the occupying buyer who needs financing is getting passed up by investors with lots of cash who are paying less money.
Solution: Create a mandatory “owner occupied only” marketing requirement of 30 days for every new listing. Require properties be thoroughly cleaned, painted & carpeted prior to listing. I find that when I can get my clients to present their home as clean as possible, we can typically get around 10% over the most recent distress sale.
(From Lillian Wong, Senior Mortgage Loan Officer at Bank Of America from Scottsdale, Arizona.)
The biggest problem in housing involves many issues in our economy.
First, banks are not lending and the reason for that is because borrowers are not able to qualify due to tight lending requirements and home equity deteriorating. Banks are also not lending because of the imposed Basel III reserve requirements and the Dodd-Frank Act as this article mentions about the Volcker Rule as part of FinReg:
The banks have to classify their assets and determine if it is better to spin-off some assets to determine whether they have enough to meet these requirements. At this point, it doesn’t seem like the some of the banks are 100% certain that they can meet these requirements which leads to uncertainty and tight lending standards.
Secondly, home prices have to level-off and start appreciating before you will see an easing of lending guidelines. The banks have staved off their foreclosure inventory and many homes are in the short sale or loan modification process that is why foreclosure inventory is down in some states. This should stabilize home values and home values should start appreciating and I have heard both Chase and Bank of America projecting home values to appreciate by the middle of next month. At least that is what they are saying and they have been wrong before so who really knows.
Thirdly, the government has to exit from the mortgage industry and I believe they are implementing their exit strategy by not imposing another QE3 and announcing Operation Twist which will raise the short term bond yields higher.
Fourthly, this is going to be a jobless recovery as there is low demand to hire new employees because consumers are not spending due to all the uncertainty in the economy stemming from the upcoming election, ObamaCare, Dodd-Frank, Basel III, the crisis in Europe, and Obama’s Job Bill. It’s a fine line that the Fed has to tread because as the velocity of money starts to increase, there is the fear of increasing inflation and interest rates.
The solution to fix the housing problem is unfortunately going to take time and I firmly believe that Bernanke has a good plan and I am almost positive that the contagion in Europe was not fully factored into his equation.
And I might even interject the proposition of another first time homebuyer tax credit incentive to spur home buying again during the next year. That seemed to work before. Just like the payroll tax cuts which were about the only thing that was working which was extended again, so, implementing another first time home buyer tax credit is not too far fetched.
So here we have seen four views, from four states from four professionals in the housing industry. For now, I’m still grumpy. Why? Because I’ve yet to see or hear any signs that the cold realities of the housing market have thawed.
We do not have enough qualified home buyers in this country to absorb an inventory which was developed during the housing bubble.
The failure of qualified/confident buyers to make a bigger dent in the nation’s housing supply is often blamed on current lending standards.
Is it true lending standards are prolonging the freeze?
While it is the case that lending standards have tightened since 2008, as I have said in previous columns, it is also the case that we have simply returned to common sense guidelines. It is possible to get a purchase mortgage with a 3.5% down payment and a 620 FICO score. Those are very reasonable core requirements. When I see real estate agents come on CNBC and say we need the banks to ease up on their standards, I notice they don’t give any details on the standards they want eased.
I do admit doing mortgages today is more frustrating than at any time in our company’s history. However, the core requirements of showing proper incomedocumentations, and having at least 3.5% down should not be made easier.
The problem is not with the core requirements, the problem is there are more homes available than there are buyers who meet those requirements. And there are more homes available now, because there were too many homes built and sold during the housing bubble to people who would not qualify today, and should not have been encouraged or allowed to buy a home in the first place.
There really is no fix that the government can or ought to do. The housing market is hanging on for the same thing we are all waiting for, and that is a strong economic recovery and real job growth. Until that happens, we will see the slow realistic grind of the “see saw” market mentioned by Alex Charfen which is, after all, just a manifestation of the economic “winter” now upon us.
I’m glad I killed enough mutton to allow me to head back into my den. It has been a long sleep.
Logan Mohtashami is a senior loan officer at his family owned mortgage company AMC Lending Group, which has been providing mortgage services for California since 1988.
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