Stopping the Freefall – Where We’re at Now (Part 2)

Here we’re going to take a look at what was put in place by the government and private industry to stop the real estate market free fall.  We will list what was done, what the results were and where we’re at now.shutterstock_90826391

By 2008 the real estate market was in free fall and people everywhere were in foreclosure and losing their homes.

Everyone everywhere was looking for someone to blame for causing all the problems. The target chosen centered on the Sub-Prime mortgage market and more specifically mortgage brokers.  Something just had to be done to right the wrong, so Congress held investigative hearings and put in place new federal agencies and layer upon layer of new regulations in a quest to put the mortgage market back on track.  In many ways there was a justifiable basis to have this belief.  A look from the outside by a person not familiar with the mortgage origination market would have had the belief that it was the subprime market and those greedy and crooked mortgage brokers that caused all the problems.

What needs to be understood is that the originating banks, mortgage companies and lastly mortgage brokers simply didn’t make the rules.  It can be argued that the big banks did hold a lot of power in our country and they did have a large army of lobbyists in Washington.    In just about every corner of our economy businesses take very careful steps to protect their money, capital and investments.  But banks operate in a vacuum outside the laws of business so that when something goes wrong, such as losing billions of dollars, bailout money is sent with just one call to Washington DC.  It’s a process that breaks the basic laws of nature and only exists in the banking world and, as just about everyone knows, the taxpayers ended up footing the bill.shutterstock_250676278

When the banks made money the bank’s stockholders, officers and directors shared in the profits.  Mr. and Mrs. Taxpayer were not invited to share in the profits.  But when the banks operated in a reckless manner and lost billions of dollars suddenly they needed a partner, a partner that was never considered a partner in good times (the Taxpayer).  The banks expected all of us to share in the losses but were never invited to share in the profits.  That was tantamount to heads they win and tails we lose.  A reckless Las Vegas gambler would find such a proposition unacceptable.  But it was good enough for the taxpayers.

There have been so many changes in the financial regulations that time and space would not allow us to delve into all of them so we will only look at the major law changes.

The dominant change in the regulation of the financial industry was with the creation of the Consumer Financial Protection Bureau (CFPB).  The CFPB was intended to be a government agency charged with replacing numerous other governmental agencies that were regulating all the financial markets in our country.  The combining of all financial market regulation into one agency appeared to be very difficult to achieve at best. The director the CFPB was nominated by the President of the United States and would report directly to the President.

The law known as The Dodd-Frank Law signed by President Obama on July 21, 2010 was the legislation that put into place the CFPB and numerous other changes in the regulation of the financial markets.  The laws and changes were so far reaching that many years will be needed to fully implement all aspects of the regulatory changes.

The primary mortgage origination and mortgage broker change that was put in place was a new national licensing program known as the National Mortgage Licensing System (NMLS).  Every mortgage originator, mortgage broker, and loan officer in the country was required to go through an education process, background check and a decent fee for the right to do the same thing they were doing prior to the start of all the problems in the mortgage market.

Mortgage originators and loan officers only offer mortgage loan programs that the politicians in Washington DC approved to be offered and FNMA and FHLMC were willing to purchase.  On all fronts only mortgage loan programs that are offered by banks, mortgage companies and mortgage brokers to borrowers have the blessing of our elected officials in Washington DC.

The loan originators were unjustly blamed for the mortgage market meltdown, when in reality the politicians and the Wall Street investment houses were the real culprits. shutterstock_187606628 Many large and prestigious Wall Street investment companies were actively repackaging and selling interests in mortgages to investors looking for a high return on their money but without the disclosed associated risk that many of the borrowers had little to no ability to ever pay the monthly mortgage payments.

The Federal government has spent about 200 billion dollars propping up both FNMA and FHLMC in an additional attempt to help the mortgage industry and the overall real estate market.  The push to relax the lending standards back in 2003 and 2004 to allow nearly everyone the possibility of owning a home was simply a political play by our elected legislators to pander to certain segments of the voting public.  As we said earlier, banks, mortgage companies and mortgage brokers only offer loan programs that get the thumbs up in Washington DC.

When everything blew up and borrowers everywhere started defaulting on their mortgages politician ran to get in front of the camera to declare they were going to get to the bottom of this mortgage mess and save the day.  Many were the same people that had advocated relaxing the national lending standards in the first place. The parties that caused the problem were the same people that were declaring that they were going to solve the problem.  It’s just like an arsonist setting fire to your home and when you call the fire department to come put out the fire the arsonist shows up to put out the fire.  In politics it’s OK to set the fire and later show up a take credit for putting the fire out and all along blaming someone else for setting the fire.  It’s usually not a good idea to pick the people who caused the problem to be the same people to solve the problem.

Another major change that affected the mortgage industry was contained in the Secure and Fair Enforcement Act. (SAFE Act).  It imposed numerous changes and requirements that affected the origination of mortgages all across the country.

Regulations put in place that affected the mortgage industry were:

  • Increased lender accountability
  • Enhanced consumer protection
  • Legal assistance to consumers
  • Appraisal accuracy standards

 

Additionally new lending requirements of banks and institutional lenders were put in place establishing minimum lending standards. Numerous new regulations and reporting requirements of mortgage bankers and mortgage brokers were enacted to curb abuses.

Additionally many loan assistance programs were put in place to assist homeowners in their quest to resolve their mortgage problems and keep their home.  Programs such as:

  • Housing Affordable Refinance Program (HARP)
  • Housing Assistance Modification Program (HAMP)

 

The results of these and other programs were just a fraction of what was advertised by the politicians that were pushing them at the time.   But it can be seen that there were some good results and there were many homeowners who were able to resolve their financing situation and save their homes.

Over the last several years the huge number of houses that were lost in foreclosure have been renovated and re-sold to new and more qualified home buyers.  These buyers were subjected to a much more stringent mortgage qualification process.  The odds are that the new buyers who purchased many of the foreclosure properties will not be losing their homes.

US Foreclosures per Year

As the national economy began to recover, albeit at a very slow pace, people who were not employed were able to secure jobs and were again able to return to paying their mortgage.  In addition, interest rates as a result of market involvement by the Federal Reserve Bank were reduced to the lowest level ever.  This allowed many hopeful home buyers the ability to qualify for financing due to lower monthly mortgage payments.  This dramatically increased the demand for houses and led to an imbalance in the supply/demand ratio.  Excess demand always leads to higher prices.

US 30 year Conventional Mortgage Rates

So here we are in August 2013, housing prices are up, and interest rates are still low even after going up by 1% over the past several months.  Foreclosures are down due to the many government assistance programs and due to efforts by banks and homeowners to “work things out”. Subprime loans are a thing of the past.  Only buyers that are able to pay the monthly mortgage payments are able to qualify for a mortgage and purchase a home.

US House Prices Year-over-Year Percent Change

Over the past 12 months many homeowners have seen the value of their homes increase.  Since interest rates have gone up about 1% loan refinancing is down and home sales are also down, but interest rates are still very low and the market in still heading in a positive direction.  The real estate market still looks good and anyone who might be contemplating purchasing a home would be well suited to dive in and start looking for that dream house.

Our opinion is that the real estate market has recovered greatly; values have come back although not to levels seen at the height of the real estate market back in 2006 and 2007.  It would be a good idea to proceed cautiously as there are many economic indicators that could turn negative and move the market back down.

We will monitor the situation and keep everyone posted.  Our next post will dive into the underlying factors that just might give an indication as to where we are all headed.

 

 

US Home Buyers 2013: Competing Against Multiple Offers

What a difference a year makes. Just a little over a year ago property owners were hard pressed to find buyers to step up and purchase their properties when they made the decision to sell.shutterstock_261390599

Like many other things in life, what is good on one side just might not be as good on the other. What we mean here is if people who currently own real estate make the decision to sell, it’s a good time since sellers will most likely receive multiple offers and should get a good price for the properties they’re selling.

But if the decision is not to leave town or become a renter then the lucky sellers who were so popular with all the buyers must now join the same group of buyers when a property is found that they want to purchase. The chances of having to compete against multiple offers is a real possibly.

Many buyers are aware of this multiple offer situation and often, in an attempt to be the winning bidder, will make an offer to purchase that just might be more than they really wanted to offer – the motivating factor being that they are so tired of walking away as a losing bidder.

Some of the people that work at our company have been involved in multiple bidding situations. Some were great decisions where they benefited from buying a property where the property continued to go up in value, but there are a couple of other people that paid too much when they purchased, since they were the last person to buy just before prices started coming down.

People who invest in the stock market have become very familiar with price fluctuations. Real estate is just like any other commodity on the stock market where the laws of supply and demand dictate prices. Many potential buyers often get caught up in the frenzy of the moment in an attempt to be the winning bidder and put a stop to the difficult task of searching for another property. Sometimes they end up paying too much.

More Buyers than Sellers

shutterstock_258330047According Lawrence Yun, Chief Economist for the National Association of Realtors (NAR), the number of available homes for sale has reached a low that has not been seen since 1999. The percentage of buyers in the market to purchase is up over 40% from year ago. Currently the supply/demand ratio is out of balance. The market now can only be described as a seller’s market.

Many sellers are purposely pricing their homes at prices low enough to prompt buyers to make multiple offers in an attempt to be the winning bidder. The sellers usually benefit from multiple offers from buyers. There are those that believe that low balling the asking price is a manipulative act by sellers and causes buyers to enter into a situation of one upping each other in an attempt to out-maneuver each other with no knowledge as to what actual prices the sellers really want for their homes.

It is so important to take into consideration comparative property sales when making an offer for a near identical property. In addition, the location and condition of the property to be purchased must be taken into consideration when making purchase offers. A bad location will, in most instances, not get better over time and properties that need repairs will cost buyers additional money following the close of escrow. This will actually add to the acquisition price of the properties.

The forces that are currently driving the recent rise in prices and the corresponding increase in buyer’s offers are due to several factors, including:

  • Ultra low interest rates on mortgages
  • Low available of real estate on the market
  • High rental rates
  • Increase in consumer confidence
  • Fear of missing the real estate boat

 

The following 2 charts were compiled by the federal governmental department known as the Federal Housing Finance Agency (FHFA). For some reason this agency has little name recognition but plays a very large role in governing the extension of credit in our country. The Federal Housing Finance Agency is the regulatory body that regulates both FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corporation). Combined, these two quasi-governmental sponsored entities (GSE) play a part in over 75% of all residential mortgages made in our country annually. The data provided in the past by FHFA has been reliable and as such we are happy to provide the information. We thank the FHFA for allowing us to re-publish the following data.

National Home Price Recovery Strong; Regions Mixed

U.S. house prices rose 0.7 percent from January to February according to data released this morning by the Federal Housing Finance Agency (FHFA). FHFA said this was the fifth consecutive time its seasonally adjusted Home Price Index (HPI) had risen more than a half-point from one month to the next. Monthly prices have not declined since January 2012.

House prices have now increased 7.1 percent over the last 12 months to a level last seen in October 2004. The HPI is now 12.5 percent below the peak it reached in April 2007.

 

 

Monthly Home Price Index in the USA, 1991-2013

 

Regionally the recovery in home prices is ragged. On a monthly basis, prices increased in eight of the nine census divisions ranging from +0.3 percent in New England to +1.7 percent in the South Atlantic division (Delaware, Maryland, District of Columbia, Virginia, West Virginia, North Carolina, Georgia, Florida). Prices in the Middle Atlantic division (New York, New Jersey, Pennsylvania) declined 0.6 percent.

All divisions reported price increases for the previous 12 months but ranging from 1.9 percent in the Middle Atlantic to 14.0 percent in the Mountain division (Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, New Mexico) and 15.3 percent in the Pacific region (Hawaii, Alaska, Washington, Oregon, and California.)

 

US Home Price Comparisons, 2012-2013

 

FHFA uses the purchase prices of houses with mortgages owned or guaranteed by Fannie Mae or Freddie Mac to calculate the monthly index.

As can be seen from the 2 charts real estate prices are going back up.

It has been a long time since the possibility existed where it could cost less to own rather than rent due to record low mortgage interest rates.

With the increase in home prices, sellers who might have not considered selling just might be swayed into putting their properties on the market which should lead to a balancing of the supply/demand ratio. There has been an increase in construction of residential properties and their arrival soon on the market should help further to level out the supply imbalance.

B9316329952Z.1_20150221134713_000_GPLA16IC5.1-0Buyers should consult their real estate brokers or agents to get complete information of all comparative properties when determining a sale price for their homes. Buyers need to make certain that the price offered is not at a price that can be considered “overpaying for the neighborhood.”

Buyers should never lose sight that just a number of years ago billions of dollars were lost by buyers paying too much and when prices fell they ended up owing more than their houses were worth. This situation can have devastating financial consequences.

If a property has been located and it’s apparent there will be or currently are multiple offers then buyers need to do their homework and decide on the highest price they are willing to offer. Make the offer and if it the price offered is not as high as others then stop and look elsewhere for a property to purchase.

Don’t get caught up in the frenzy of the moment and get carried away. Do your homework, take your time and be persistent. The right property awaits you.

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