The Good, the Bad, and the Ugly…
A day doesn’t go by that I’m not asked: “How’s the real estate market? Any good news?” I’m here to say that we’re seeing increases in the number of properties going under contract this spring.
There’s a perfect storm of events going on right now: large inventory of homes; low interest; stabilizing list prices. Properties under $300,000 are selling at a brisk pace. Those who can purchase right now are doing so – and therein lies the rub.
While we have an excellent confluence of events, the difference is that buyers are worried about their employment. Why purchase a home when you don’t know if you’re getting a paycheck next week? The 401(k) plans have diminished, and companies are tightening their belts in response to the current economic conditions.
Banks have tightened their control as to who gets how much loan. Though this might sound harsh, banks are simply reverting to the days before the real estate boon earlier this decade – if you couldn’t afford a home, then you had to wait until you saved enough money for a down payment.
Sellers are selling for various reasons: job relocation; job loss; downsizing; and/or upsizing. Many are involved in short sales, wherein the property is sold for less than the amount due on the mortgage, and the bank agrees to accept the lower amount to satisfy the debt. This saves the homeowner from being foreclosed on by the lender and not ruining his or her credit.
In today's market, it is more and more common that people can not afford to pay their mortgages due to unfortunate circumstances in their lives. The reasons may include a dramatic jump in payment due to adjustable interest rate (ARMs), or 100% financing when purchasing the house; loss of job, or perhaps disability or divorce, and even tenants not paying their rent.
Locally this spring we’ve seen our fair share of properties sold as short sales and/or going into foreclosure. These properties bring the value down of neighboring properties, affecting those who want to refinance their current mortgage.
The loss of home values put many more mortgage borrowers underwater, meaning they owe more on their loans than their homes are worth. That increases foreclosure rates in two ways: underwater borrowers have no home equity to draw on should they have to pay for unexpected expenses such as big medical bills or major car or home repairs. That's makes them more likely to miss payments. And when home values fall far below mortgage balances, homeowners often walk away from their loans.
As far as new homes go, we’ve seen some things we shouldn’t be seeing, if our nation’s economy is to recover. Homebuilders obtain what is called an AD&C loan: Acquisition, Development, and Construction. Lawmakers, banks, and regulators have been conspiring to increase credit restrictions and lenders are even cutting off loans, causing unnecessary losses on these loans, and foreclosures. The situation remains critical, and banks increasingly are asking for additional equity based on low appraisals that underestimate the economic value of housing projects.
One case: A builder in the Pacific Northwest is having difficulties getting a loan extension from his bank. The bank ordered a re-appraisal of the company’s inventory of homes, which shows the value has declined, and is now requiring additional equity from the builder. The bank wants to increase the interest rate, which is currently at 6%. The builder has excellent credit and the loan is current. If the bank rewrites the loan to a higher rate, the builder will surely default; that is why he is asking for an extension under more favorable terms. The bank, which has received millions of dollars in TARP funds, has refused to consider the builder’s plan to reduce the loan rate by 1%.
This is an example of how our policymakers, lenders, and regulators are choosing to take the easy way out. They are not stepping up to the challenge of helping a builder and helping to stimulate our economy.