The fundamental issues of this article is: 1) is the US housing market recovering and 2) why or why not?
As can be surmised from some of our recent postings, the US housing market seems to be stabilizing, at best. In certain regions of the country we are seeing more improvement than in others. However, in my opinion, the US housing market is
not in a sustained recovery as of yet. Overall sales of homes are lower now than they have been at any point in the past ten years.
The question then becomes: with all of the avenues taken by government agencies in order to stimulate the housing market, why is there no recovery, yet?
The primary reason is obvious, the economy is still on unsettled grounds. In my view, the small business owners, self-employed and real estate investors have been severely damaged during this prolonged recession. Small businesses have been an engine of job growth and investors have helped to expedite getting housing supply and demand in balance in previous downturns.
One of the main things the government agencies have tried to do in order to help heal the housing market is lower borrowing costs. Reduced rates lowered the cost of owning a home and helped spur borrowing to grow businesses; this in turn helped spur job growth and economic development.
The Federal Reserve has pushed interest rates to extremely low levels and mortgage rates are near historic lows. Why is this not working? and why should those interested in buying, selling or investing in real estate care?
Let's take the second question first: we should care because tracking the trends is important to understanding the market.
Why has lowering the interest rates not worked so far? Here's my opinion:
1) rates are near historic lows for the "prime" customers. Essentially those that do not need a loan and are low credit risks are getting the advantageous loans. I have had several clients start out as cash buyers and then turn into taking a mortgage-- why? lenders are offering very advantagous rates-- to those with good credit.
2) Private mortgage backed security market imploded. Only those guaranteed by the quasi-government Fannie Mae and Freddie Mac are able to sell its mortgages into the market. With "Fannie" and "Freddie" essential bankrupt if not for government intervention, the agencies are guaranteeing only the better creditworthy loans.
3) Underwriting requirements have become much stricter. Full documentation and much less discretion by lenders in borderline cases.
4) Prospective homeowners need loan-to-value ratios that are more in the 70% range. Lower credit scores means more downpayment and increases to the mortgage rates. People need more cash down and the low rates for the most creditworthy do not apply to folks with FICO scores of mid-700s and below.
5) Appraisals are much more cautious in the comparables and the psychology seems to be an expectation of further deterioration. Therefore, the appraisals are conservative; this leaves the lender feeling as though it has less collateral-- means higher rate and more of a downpayment required.
6) Consumer psychology is such that those that might have taken a risk and bought a home in the past are holding back. Not sure of their future earnings and delaying large purchases. Why buy a large ticket item when you are not sure you will be able to afford it or if you think the value may decline in the next six months-- why not just wait.
7) Many homeowners are stuck-- they are underwater on their homes, meaning they owe more on the mortgage than the home could be sold for in the current market. Many of these people want to downsize and move on. However, the reality is they are stuck until values increase-- assuming they can hold the home during that period of time. If not, it becomes another distressed home on the market (i.e., short sale or foreclosure).
8) Lenders are not offering loans to investors-- they need to come up with all cash needed. The days of securitizing and selling investment paper is a thing of the past, for now. That means, even savvy investors-- those that could take advantage of the excess supply are less likely to soak up some of the excess supply. This continues to leave the supply and demand curve out of equilibrium-- for now.
We will continue to monitor these issues going forward. We think these are some of the key issues for those who are involved in the real estate market. Please feel free to post an opinion or question and we will try to address them in future posts.
If you are looking to buy, sell, rent or invest in the South Florida real estate market, please feel free to contact me.
Michael Friedman
Realtor, Certified Distressed Property Expert (CDPE)
Lang Realty
561-989-2100
http://michaelfriedman.rmlsfl.mlxchange.com/?Page=7395217 <--property search link to cut and paste into your Web browser
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