Archive for April, 2009

Another spring, another dormant season in real estate?

Thursday, April 30th, 2009

Maybe yes, maybe no.

In 2008 alone, the housing bust wiped out an estimated $2 trillion in home values. But for the first time in a long time, we are finally seeing an upside

The same falling home prices that wreaked so much havoc in the economy are queuing up as the end-solution to the bust.

With prices down about 25 percent from their 2006 peaks, homes and buying incentives are tempting bargain hunters once again. Many economists agree that we’ve seen the bottom of the market and can see a faint but discernible light at the end of the long, dark tunnel. Sale volumes are up in many parts of the country, but prices aren’t.

In early April this year, the average 30-year, fixed-rate mortgage loan dropped under 4.8 percent to historic lows, according to Freddie Mac, prompting some qualified buyers to buy and others to refinance.

At a spring speech, Harvey Rosenblum, executive vice president and director of research for the Federal Reserve Bank of Dallas, said the economy will improve markedly in 2010 and should be back on track by 2011. Housing, which led the country into this economic mess, could well lead it out, he said, partially because of the Obama administration’s $75 billion mortgage relief plan.

The stimulus plan, in part, is offering first-time homebuyers a tax credit up to $8,000, plus a refinancing program that gives much-needed help to owners who are struggling with mortgages and incentive to their lenders.

Credit is finally starting to flow again, and prudent families with a reasonable down payment are for the most part getting the go-ahead to buy. Ian Shepherdson, chief U.S. economist at High Frequency Economics, noted this spring that falling housing prices are likely to slow heading into the summer months and possibly show improvement, cautioning that “foreclosures are weighing heavily on prices.”

A history lesson

There are some important lessons to learn from the bust, lest we be doomed to repeat them. In a nutshell, here’s what happened:

Years of robust health in the housing market prompted overinvesting, quick-flipping, overbuilding and credit overextension, enabled by cheap financing. Homes began to exceed their brick-and-mortar and land values vastly, and owners started borrowing against hoped-for run-ups in future values. Meanwhile, builders cranked into high gear to accommodate zealous investors and builders.

Caught up in the frothy market, lenders and buyers alike bucked basic risk-management principles by implementing unsustainable mortgage arrangements, zero-down deals and other dubious lending programs, many with upward-adjusting ARMs — adjustable-rate mortgages that would later cut the legs out from under them.

Meanwhile, some financiers read aggressive federal anti-redlining guidelines as a green light to lend to everyone with a pulse. Lenders pushed these and other mortgage risks onto institutional investors the world over via mortgage-backed securities and bonds, which even some of the world’s best financial minds failed to identify as ticking time bombs.

The last wave of investment homes was sold abruptly at big losses, and values started dropping across the board, especially in places like Florida, California and Nevada. ARMs reset and foreclosures continued to spiral. Suddenly, hundreds of thousands owed more on their homes than they were worth and had nowhere to turn. Soon, the stock market tanked, the values of retirement plans were slashed and millions of jobs were lost.

The net result: Real estate has been repriced. The rest is history — a history we should not soon forget.

The repricing of home values almost everywhere in the country brings with it a whole new real estate reality, one that marks a return to some of the real estate “rules” of the past. It’s a reversion to many tried-and-true fundamentals you should recognize and comprehend:

  • • Save smart for a down payment. It’s true that tying up all your equity in a mortgage can take away your emergency cash buffer in a downturn. But with the market starting to stabilize, the benefits of a large down payment — from 15 percent to 20 percent — will pay off in the coming up-cycle in the form of higher equity, lower payments, better interest rates and more readily available refinancing.
  • • Borrow within your means. Just because you’re approved by a lender for a specific mortgage amount doesn’t mean you can really afford the home. The wholesale defaults that occurred on tens of thousands of too-lenient loans carry a strong message: Live within your budget. Lenders grew more complacent with underwriting and appraisal standards because double-digit annual price appreciation lulled them into believing their collateral was safe. In their gamble, they abandoned the three C’s of mortgage lending — credit, capacity and collateral — and everyone lost. Until the run-up in values, a safe mortgage on a home was considered no more than three times a buyer’s annual family income. Some old-school traditions need to become new-school traditions.
  • • Buy for the long term. This isn’t the time to try to make a fast buck in real estate. There’s still some market pain left, and it’s unclear when prices will rebound. If you’re buying this year, plan on staying put for the long haul.
  • • Your market is unique. National housing trends don’t mean anything. Understand your market’s dynamics, which include the health of the local job market, local foreclosure statistics, price movements, a home’s average time on the sales block, the lack of — or abundance — of newly built homes coming upstream and the prices of “comp” sales in your specific neighborhood of interest.
  • • Watch for the pricing warning signs in the next cycle. Continued home-price run-ups year after year should raise a big, bright, red flag in your castle. From 2000 to 2005, U.S. housing prices increased by an average of 53 percent, with many markets far exceeding that, including California at 109 percent, Nevada at 94 percent and Florida at 90 percent. That party ended abruptly, and nearly everyone suffered a hangover.