I used to own a mortgage brokerage in a former life. Well, I still like to read lender rate sheets, because you can tell a lot about the psyche of smart money by reading between the lines. Lenders that are selling Fannie or Freddie-backed loans are "pricing for the worse" (raising rates) on mortgages that have a Loan to Value (LTV) greater than 60 percent.
Before the meltdown there was no pricing for the worse until LTVs breached 80 percent. Lenders are mitigating risk 20 percent below where they historically have when it comes to a home values in relation to the loan amount. I'm no world-class economist, but that's something to be taken seriously, too.
Are consumer home sellers psychologically prepared and willing to accept this? Depends on context. If they have to move and actually have equity, then yes, they can accept this. If they don't have to move and/or have little equity, then no, they likely can't accept this.
Are lending institutions and other clearing houses willing to accept this? Absolutely. And they are the class of motivated sellers with the inventory, room and incentive to do so.
Either way, I think we agree that there is another 10 percent to 20 percent to go before we hit bottom. I'm simply offering that current buyers, residential and investment alike, can get there sooner rather then later.
Your point about banks (investors in general) having little incentive to make mortgage loans is well received. While attending the Asset Backed Securities conference in October I sat in on a panel that included the current president of Ginnie Mae where they discussed what the threshold was before investor/ mortgage backed investment incentives began to align. The answer was around 5.875 percent, which is where private capital begins to reenter the market qualification standards begin to loosen from their current state of 'we only lend because the Government says we have to and guarantees our losses.'
I'm not going political with you my friend, however, I do believe Congress limits the mortgage interest deduction to
To your point, inflation and rising rates are a matter of when, which is another reason to buy now if you can. A real estate play based on future inflationary pressure is highly logical if you employ the historically successful acquisition and investment strategy of buy and hold.
It's tough to reverse momentum or sell people on such before it actually begins to happen. So while I'm not bullish on the housing market, either I do think we're dragging along a saw toothed bottom. When things to begin to turn, they'll turn quick -- and if you can't afford to buy in 2011, you likely won't be buying for a while.
Finally, speaking of your Realtor and his/her brethren, they are vital to helping to keep homes affordable and transacting but their traditional bloated business model is in desperate need of an extreme makeover, as are the methods for identifying those who can effectively help consumers navigate the landscape. Any thoughts on how to address the issues on this front?
The information about how lenders are now pricing for the worse on 60 percent LTV is stunning. So the smart money thinks home values have another 20 percent to drop? Hold that thought.
At the same time, you and I have both seen huge upsurge in interest and demand for rentals. Back in February of 2010, we saw that rent-related search terms overtook sales-related search terms in the real estate category. We're still not seeing employment growth, foreclosures are still happening, and banks are requiring more money down for mortgages. So rent demand is going to stay strong in the foreseeable future, displacing buyer demand.
The consumer who has to move and actually has equity is not prepared to accept a 20 percent loss. They're prepared to rent out their house instead. That's what I'm doing. It's what the landlord of my new rental in Houston is doing. Because we know that in an environment where fewer and fewer people can qualify for mortgages, even if they have the income because they don't have the assets and money for a 20% down payment, rental rates can only rise, while our fixed rate mortgages guaranteed by the taxpayers cannot.
I think we'll see sellers get realistic in 2011. Maybe it will take a disastrous spring market to drive the point home. But hey, if you can find a buyer willing and able to pay anything close to your asking price, now is a great time to sell. I hear how busy some top producing agents I know are (we're talking 20-30 listings scheduled for January), and I think maybe some savvy sellers are realizing they gotta get out now.
I'm glad you brought up the Realtor and other real estate professionals. I'm struggling with the idea of fiduciary responsibility to the client coupled to getting paid only on a successful close, and as a percentage of the price, especially in an environment where the smart money is factoring in a 20 percent drop in price. Listing agents can, sure, because they should be telling every single potential seller to sell now before the bottom drops out again. As you point out, if someone isn't buying in 2011, he may not be able to buy for quite some time. Well, if you can't sell in 2011, you may be waiting a long time for prices to come back to 2010 levels, which aren't all that amazing.
The only responsible thing, I think, that a buyer's agent could do today is to make sure that the client is willing to pay 20 percent for intangible benefits. People do this all the time, so why not with houses? Buy a diamond ring and the minute you walk out the store, it's worth 30 percent less. Drive a new car off the lot, and the second that you hit the street, it has depreciated some 20 percent. Why not a home?
If you really love that sweet 4BR colonial with a nice patio, then buy it. Just know that you're probably taking a 20 percent hit right off the bat, at least today. Yes, yes, in the long run, housing may rebound and you'll be able to sell it 20 years later for your retirement nest egg. But then again, as Keynes said, in the long run, we're all dead. As long as people are willing to look at the house as a home, in which they intend to live and raise a family and have parties and whatever, instead of an investment, the only question should be whether they can afford the payments or not.
The tricky thing, I suppose, is finding such a buyer agent who is willing to be straight up and honest with you. And knows what's going on. Most of that will be done by feel, but I do think there may be two things I would try – and plan to once I'm in the market to buy in Houston.
First, I would look for an agent who doesn't need the money. While I think many realtors are able to put their self-interest aside, I'd much rather be advised by someone who doesn't need me to buy a house in order to pay her own mortgage that month. That means either (a) a mega-producer for whom a $7,500 payday really is a drop in the bucket, or (b) someone with a wealthy spouse who is just doing it as a lark, or (c) someone with a trust fund.
Second, I would look for someone who knows more about real estate than I do. Okay, in our case, that might be asking a bit considering what we do for a living. But for most consumers who aren't obsessing over HUD pronouncements, or mortgage lender rates, if they do some basic due diligence, they should know enough to know whether the "real estate expert" they are speaking to knows more than they do. Plus, looking for someone who really does know, who has been reading up on the market both locally and nationally, who knows what's been going on in the bond markets, who knows and can interpret macroeconomic signals to local real estate -- that usually knocks out the trust fund babies and the parttimers doing it for fun.
But as long as we're asking speculative questions, let me ask you this, since you've been a mortgage broker and have been around this industry for so long: Why can't the same person do the mortgage and broker a house? Why separate those functions so much? Would Realtors be hurt somehow by having to learn finance and how to read a rate sheet? Would mortgage brokers be unable to function if they have to show houses and get a sense of customer demand?
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