Following housing’s bouncing ball
July 13, 2011 2:48 PM
I frequently hear housing experts use the phrase “bouncing off the bottom” when they talk about residential price trends. If prices tick up then tick back down we have just seen a bounce.
This makes the experts look smart, until one considers that the bounces are going downhill indicating that there was no true bottom. Did you ever see the old “Little Brown Jug” cartoon, in which viewers were invited to sing along and “follow the bouncing ball”? What they didn’t tell you was that the little little brown jug was filled with hooch that got all the animals drunk and distracted. Is that what is going on here?
The “bouncing along the bottom call” is similar to a technique used by stock pickers on CNBC who claim to be “cautiously optimistic,” so they can play both bear and bull, depending on which way the chart blows. If the market goes down, well, they warned us to be “cautious”! If it goes up, well, they told us they were “optimistic”! Speaking of bad calls, I have also heard “housing experts” float the idea that lending institutions in this country will ease up their current lending standards. Their hope is, of course, that more home buyers will qualify and thereby increase the number of buyers in the market.
Perhaps nobody wants to be the bearer of bad news. Perhaps nobody wants to throw up their hands and admit they just don’t know what 2011 and 2012 will look like in the real estate market? Or are they all short sighted and have even shorter memories? None of the hopeful comments by the housing experts, thus far, seem to acknowledge hard, cold facts.
Confounding matters more, President Obama is now focusing back on housing. At a Twitter town hall held last week he said that the progress made with the foreclosure crisis is “not enough. And so we’re going back to the drawing board, talking to banks, try to put some pressure on them to work with people who have mortgages to see if we can make further adjustments.”
The Obama administration has admitted that none of the federally sponsored programs to assist struggling homeowners, and thereby stabilize and begin to increase home values, worked. So now his administration is beginning to come up with yet more novel “solutions” to the housing crisis.
Evidently, we have not learned that it is not and should not be the Federalgovernment’s job to boost housing prices?
All of the above tells me that none of the experts has the tools, the talent or the short and long term memory required to provide insight into potential solutions to the housing crisis.
The truth is there isn’t too much that can be done without going to back insensible lending standards.
The pool of qualified buyers has shrunk and will not grow until incomes grow, and unemployment drops. Last week ought horrible jobs number to knock sense into the talking heads on TV. Unemployment is up, incomes are down, and not enough people qualify for loans to make a dent in the housing inventory glut. And it is completely sound and reasonable that a borrower will not be given a loan unless that borrower has the income, assets and credit score to prove him a good risk to repay the loan.
There are three core standards of good lending: a good credit score, fully documented income and verified assets.
These simple pillars of lending should not be changed because the principal goal of those standards is to ensure that the borrower has the capacity to pay back the loan.
If we change these pillars, then we risk inviting home owners into the market that can’t keep or pay off their home.
I have also heard hopes expressed that more innovative loan products will evolve, to attract more buyers.
My reply to that is that if ever I see or hear advertised again a 1.25% Option Arm loan, I will know my sins have caught up to me and I am now in Hell.
The days of sub prime 100% loans stated income 2/28 and 3/27 loans are gone because those are formulas for disaster. Creative financing creates trouble.
So, when I hear the idea floated that lending standards should ease, I want to ask what changes to guidelines or loan products would be economically feasible, and likely to spur massive growth in home buying?
The fact is there is not a good answer to the question above..
Look, I know all too well how frustrating it is to obtain a mortgage these days. Even the most qualified borrowers I work with tell me the process of getting a mortgage feels like an FBI interrogation. Don’t be fooled or lulled into a daze by the “bouncing ball” or the pie in the sky hopes.
There is no way Freddie, Fannie, FHA, or the Banks will ease up lending standards spurring a new wave of home buyers to pull this market upward. We may even have further to fall.
With the economy in a rut and a possible recession coming in the next few years, the financial institutions will continue to be cautious with lending. The housing boom lasted a long time and the struggle to regain footing after such a hard fall will take a long time as well.
Logan Mohtashami is a senior loan officer in his family run Mortgage Company, AMC Lending Group, which has been providing mortgage services for California residents since 1987. LoganMohtashami.com