The biggest problems I see from where I sit in getting out of this mess are as follows, in no particular order:
1. Second mortgages have to come back or lenders have to lend on less than 20% down. That genie can’t go back in the bottle. In places like Eastern MA where an average home is worth 500k, asking every buyer in that market to come up with 100k is out of the question, even if they are quality borrowers, with plenty of income and enough reserves to weather some bad circumstances. Forcing people to pay huge monthly PMI bills in order to buy with less than 20% down has a dramatic, immediate effect on buying power, thereby depressing prices further;
2. Interest rates have to come down. Based on the 10 yr treasury, interest rates on conventional mortgage products should be about 75 basis points below where they are right now. It seems the lenders have decided to lend less, but make more on what they are lending. A recipe for disaster. A drop down to the mid 5’s would save literally millions of people from foreclosure because it would give them the chance to refinance. We’ve been hovering over 6% with a couple blips below that for about 2 years. People that have been in the business a lot longer than myself can find no rational way to determine how interest rates are being calculated by the lenders right now. It’s like they are throwing darts at a board in the morning.
3. Taking off on the first point, if you don’t bring back second mortgages, then something has to happen in the jumbo market. Right now, I’m working with a client that wants to buy a 900k house. He is putting down 250k, has 700+ credit and makes almost around 400k a year. The best rate he can get on a 650k loan is over 9%. NINE PERCENT. He’s putting down over 25%, qualifies in every sense of the word, but jumbo rates are so high that even he is priced out of that market. If people like him can’t buy, the market at that level will be destroyed. Either bring back second mortgages in order to allow for a splitting up of the loan into two to avoid the jumbo limit or bring back reasonable jumbo rates.
Anyway, those are a few things that have been jumping out at me recently, and they are just a few, but they all boil down to the same basic idea: The lenders need to start lending again and they need to start doing it in a reasonable fashion.
The Housing Crisis – A View from the Front Lines
August 13th, 2008 at 3:55pm · 3 Comments
The following was posted on a private corner of the interweb by an acquaintance who is a real estate attorney. It’s reprinted here with his permission. It’s easy to see from the problems he outlines why the housing market still has a few years of difficulty ahead.
Tags: Real Estate
3 responses so far ↓
1 libertas // Aug 13, 2008 at 5:15 pm
That makes no sense. If he is “priced out,” then if the house is really worth $900K, others must be willing and able to bid and pay that, and the market is functioning just fine. If the market is at equilibrium, then if rates come down, the price will go up and his situation will not change. He will still be “priced out.” Although he isn’t – PIT would be about $6K/month, and he is supposedly making $33K/month. Does he want the seller to “give it away”?
When I bought my first house in California, I paid 9.25% (in 1983). With the tax benefit, that’s about 5% after tax. Tough. 20% down payments were usual, although seller financing was sometimes available to make it easier.
But this writer just wants to bring back the bubble. It doesn’t “have to” happen. I doubt that it will happen. Prices will continue to slide, and all his client needs to do is wait to find a seller who will accept what he is willing to pay.
Interest rates are where they are because of default risk. Lenders know that when prices are declining, foreclosures and losses rise, even for prime credits. Lenders have to not only preserve their remaining capital, but make enough of a spread to rebuild their capital through profits. This means spreads will stay high, and probably go even higher.
Second mortgages and HELOCs are typically total losses in foreclosures these days. They will be hard to get until price stability returns.
2 muellerjoerg // Aug 13, 2008 at 5:42 pm
Chris,
Do you think the date in 2010 you mention in the special report as a VERY important one for market changes and the Long Wave winter would be good for buying RE? Could both prices AND interest rates reach a low then?
Thanks, Joe
3 deuxsous // Aug 14, 2008 at 12:25 am
libertas,
I agree with you completely. People are now demanding “normal mortgage rights”, but what they really need is for the market to clear. As in your case I had to do a California personal real estate transaction in the early 1980’s–late 1981 to spring 1982. My wife and I were working very long days in San Francisco and the commute from Marin had to stop.
But rates were 14+% and loans were non-existent. We had one offer to exchange for a small guava platation on Maui! In retrospect it could have been a good deal as the “plantation” ended up as part of a shopping mall, but it was out of the question. Finally a woman appeared who had coveted our home since her childhood friend had lived in the house, and her husband, a rising star at AutoDesk, was able to get bridge financing from his company (interest only) at 14%, and complete the sale.
On the other end in the city we got a fabulous deal buying for cash.
Much later in the 1990’s in NM we hit another real estate air pocket for several years. There really is a once per decade cycle in real estate just as there seems to be in “bank tanks”. Bank reserve leverage, mortgage leverage, and greed collide and have to be sorted out.
Stuff gets done at market if buyer and seller are willing and able. Otherwise not.
TD
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