Posted by Michael Haran on Feb 13, 2009
A lot of people are sitting on the sidelines waiting for residential real estate prices to dip even lower than they currently are. Is this a smart move or are they missing a golden opportunity? Everyone knows that wealth is created in times like this but is this the time?
The current economic situation has created a buying opportunity that hasn’t been seen in the past 20 years. Entry level home buying activity is dominated by first time buyers and investors but trade up and upper level housing sales have ground to a halt. So what’s the problem why aren’t housing sales going through the roof?
The reason is we are in a deflationary mind set. People still think housing prices are still falling. This is why people are not buying and banks are not lending. Why buy a house if it could be worth less tomorrow and why would a bank lend on a depreciating asset? And why do they think this? Because it’s true. Housing prices are still falling. But should that be a reason not to buy? I don’t thinks so.
The cause of the entry level price depression is over supply. This, in itself is not unusual. Normally, residential housing runs in a five year cycle. Prices go along; the population continues to grow; not enough houses; prices increase with demand; builders over build to that demand. Sales slow; prices stabilize to reflect that demand; prices go along; and the cycle repeats itself.
What happened to the last cycle was that cheap money caused an over supply of houses to be built. Based on the California Department of Finance population growth projections, the current over supply of housing stock should be absorbed by the end of 2010. However, because the current supply of housing is artificially large it has affected the core U.S. economy. And because 75% of the U.S. economy is based on retail sales, the collapse of the housing market has affected the value of the U.S. stock market.
As J.P. Morgan said during the collapse of the stock market in 1929, “buy when there’s blood in the streets.” Now no one knows when this real estate market will bottom out but bottom out it will. The current over supply of the hosing stock will be absorbed and the financial systems will be re-regulated. People will make money in this market. The only question is will you be one of them?
Even in high priced markets like the Bay Area opportunities abound. The value in buying an entry level home for $300k less than it was priced a year ago is obvious and dominates the headlines. But what about the trade up and upper end markets? The lack of a trade up buyers has affected the upper end market. There is a common attitude that the upper end homes are recession proof. To a certain degree that is true. If an owner of an upper end home doesn’t have to sell, they will simply keep their home off the market until the market comes back into balance. But there are always people that have to sell even in the upper end.
The deals are there and all a serious buyer has to do is educate him/her self and start looking. In addition, the pay-back provision of the $8,000 first time home buyer tax credit has been repealed in the final stimulus bill. No one knows when this market will bottom out but close is good enough. Wealth is created in times like this.
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Posted by Michael Haran on Oct 25, 2008
Since most agree that the foundation of our economy is housing it is housing that needs to be stabilized or little else will work. Davis Moffett and Herbert Allison (Fannie Mae/Freddie Mac) have called for suggestions on how to work out this current housing crisis. The Treasury Department has been working on finding ways to slow down foreclosures and help people stay in their homes.
FDIC Chairwoman Sheila Bair recently said that the $700 billion rescue package included authority to offer government loan guarantees and other incentives as a way to encourage banks and mortgage lenders “to prevent avoidable foreclosures.” She said that the recent extensive rescue strategies need to do more to get at the millions of homeowners who are headed for potential default and foreclosure even if it means the Treasury absorbing losses on defaulted mortgages.
Neel Kashkari, the interim assistant secretary for financial stability who’s in charge of the rescue effort said that the Treasury is still in the “policy process.” To which Senator Dodd (D-Conn) responded that the Treasury “needs to get this moving.”
Urgency is the issue. Dodd referenced “10,000 foreclosures per day” and it’s estimated that over 10 million more homeowners will have zero or negative equity by June of 2009.
The Treasury’s new HOPE for Homeowners (H4H) program was put into law this summer. Its purpose is to keep homeowner from mortgage default and foreclosure. Lenders who voluntarily allow borrowers to refinance under this program are required to reduce the size of the mortgage to no more that 90% of the home’s current appraised value. For allowing the mortgage writedown, the government goes 50/50 with the homeowner regarding future appreciation.
The FHA can insure up to $300 billion of these new loans and it’s estimated that 400,000 homeowners could avoid foreclosure.
Some industry experts think that this program is a bad deal for the homeowner but, if you think about it, it’s nothing more than the homeowner going partners with uncle Louie but in this case it’s Uncle Sam. A lot of homeowners get started with the help of older relatives who put up the down payment with the homeowner partner making the payments. When the property is sold they split the profit.
In and of itself I don’t think this is such a bad deal considering it allows the homeowner to stay in their homes a with a 30-year fixed rate mortgage that they can afford. My problem with this program is two fold.
First, the government posts an instant loss and second, the problem isn’t really solved if the property continues to decline in value.
What I think would be a better program, or at least an alternative to the H4H program, would be to keep the homeowner’s existing mortgage in place but rewrite the homeowner’s payment at no more that the traditional 30% of their income. The home owner retains ownership of their home and can use the other 70% of their income to buy consumer goods and services, save for college or put into retirement accounts. This would be an instant infusion of money into the retail sector specifically and the overall economy in general. Once the home regains enough equity for the homeowner to sell or refinance, the governments would get the original mortgage principal paid off and the homeowner would get the equity above that which is what they expected when they bought the house.
With this program it doesn’t matter if the home values continue to decline because eventually, when the market comes back through both lack of supply and population growth, the government will get the original mortgage amount paid back.
Now granted, if the homeowner has to move and can’t afford to keep the house, they will have no choice but to give the house up. But if the homeowner could rent the property the debt would be continued to be serviced. Plus, foreclosures can still happen with the FHA mortgage. These mortgages would be 30-year fixed loans with no negative amortization.
One of the features of the H4H mortgage is that FHA charges the home owner a 3% mortgage insurance premium to initiate the new loan. This not only sounds like “stepping over a dollar to pick up a dime” but also the old way of doing business.
The fine points would still have to be worked out but the best part of a loan program like this would be that it could be done quickly. No appraisals are needed and the boost to the economy would be immediate.
The times call for innovative programs to stabilize the nation’s housing market. If we fail another possible 10 million foreclosures loom on the horizon. Until we get to the bottom of this market nothing will work – including us.
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