Real Estate Market Confidence |
If you are trying to make sense of the condition in the real estate and mortgage industries these days, don’t bother referring back to your old Economics 101 textbook where you first read about the laws of supply and demand. You’ll remember the side of the equation that says when the price of a product goes down, the demand for that product goes up.
According to The Wall Street Journal, the median U.S. home price was $201,000 in January of this year, down 4.6 percent from January 2007. The S&P/Case-Shiller National Home Price Index for the fourth quarter was down 8.9 percent from a year earlier, the biggest drop in 20 years. Furthermore, there was a 10-month supply of existing homes for sale in January, up from just under five months during boom times. The supply is up so prices are down.
In the credit markets, interest rates are relatively low. The 30-year fixed rate mortgage is at about 5.8 percent compared to over 8 percent in 2000. So not only are home prices at low levels, so is the price of the money needed to buy those homes, but demand has not been following suit.
Some say that people expect prices to drop further and are waiting to catch the bottom. Others point to apprehension about the economy in general or the state of the mortgage industry specifically. All of them have merit, but beg another question - should these macroeconomic analyses be the deciding factor for each individual?
Let’s look at the Consumer Sentiment Index (not to be confused with the Conference Board’s Consumer Confidence Index) to answer that. It assesses consumer confidence regarding personal finances, business conditions and purchasing power. It fell to its lowest level since 1992 in March, meaning that consumers are nervous about the economy and generally less willing to spend money. It is historically a pretty accurate economic predictor, so if you combine that with the already slow housing market and continued fallout from the mortgage industry situation it paints a rather bleak picture.
The accelerating rate of foreclosures, especially on sub-prime and other adjustable rate mortgages (ARM), is causing liquidity problems throughout the banking and finance industry. According to a recent Wall Street Journal article, the escalation in foreclosures may not be limited to sub-prime loans. The rapid rate of home value declines in some markets is causing more and more borrowers, sub-prime and higher quality, to owe more on their homes than they are worth, thus raising concerns that homeowners who can afford to continue making their mortgage payments may decide that it’s no longer worth it and will just walk away from their homes.
The mortgage industry touched the stove and found it hot by getting too aggressive with risky loans, but now lenders are returning to more sensible lending practices and hopefully the industry will right itself over time. There is speculation that Bank of America is planning a total acquisition of Countrywide, having already invested $2 billion. We’ll have to wait and see how that plays out, but there will be more casualties elsewhere. In April, Capital One Financial closed its wholesale mortgage business and Lehman Brothers shut down its sub-prime lending unit to name two.
Let’s look at government intervention. The Federal Reserve’s backing of J.P. Morgan Chase & Co.’s buyout of the failed Bear Stearns at what amounts to pennies on the dollar. While some believe this was a viable solution, some consumer advocates argue it is unfair to “bail out” an investment company, at taxpayer expense, whose own practices not only brought on its demise, but also played a role in the entire industry’s troubles, while not offering any relief to consumers hurt by that company’s actions.
The mortgage industry is taking its own action. At the urging of U.S. Treasury Secretary Henry Paulson and former Housing and Urban Development (HUD) Secretary Alphonso Jackson, the mortgage industry created an alliance in October 2007 called Hope Now. Working in collaboration with credit and homeowners’ counselors and mortgage servicers, lenders are seeking out borrowers who may be at risk of getting in to financial trouble, possibly default, and reworking their mortgages in an attempt to stave off foreclosures. Through February, lenders have worked out over 1.1 million loans
Congress already has its eye on intervening with this process. There is a bill circulating that would have the Federal Housing Administration (FHA) guarantee the reworked mortgages, putting taxpayers on the hook for reworked loans that go bad again.
In the meantime what is a consumer to do? For homebuyers, if you’re thinking purely in terms of investment value, then maybe it’s worth the risk that somebody else will snap up that house, but weren’t we talking about your dream home?
Keep in mind markets and industries go through ups and downs all the time and through it all, consumers buy goods and services based on their needs and wants. Therefore, you should make your decision based on what you want, what you need and what is right for you. Experts encourage buyers to be fully informed and prepared. Be absolutely certain about the price, interest rate, closing costs, taxes, insurance, monthly payment - everything.
If that is manageable now, and in the future, move forward because property values have settled to some degree and there are some excellent buys in our market. For those who try to predict interest rates, if you can handle the payment and everything else about the deal is in order, lock it in now and don’t look back. If interest rates rise later, then you’ve wn that game. Plus, you can refinance if it is to your benefit.
But keep in mind there is no general blueprint that applies to everyone when it comes to refinancing, and there are all kinds of reasons to do so: lowering monthly payments, changing mortgage terms, capitalizing on equity for other expenses. For example, if you have a 30-year fixed rate mortgage at today’s interest rate, there’s obviously no point in refinancing to another 30-year fixed because you end up paying closing costs to get the same interest rate. However, let’s say you want to build an addition on your home and you have enough equity against which to borrow the necessary cash. Now you have a rationale to refinance even if there’s no interest rate benefit. On another hand, if you closed on your mortgage seven or eight years ago when 30-year fixed rates were in the upper 7 percent range, this is where staying on top of the news will do you some good because you’ll know tha the current rate is about 5.8 percent and you would do well to refinance from an interest rate standpoint.
These are simplified scenarios, but the point is that there is no broad stroke answer for everyone who asks the question when is it a good time to refinance? Again, it depends on the individual situation.
Refinancing is on the rise and experts attribute this to attractive rates and the result of ARM’s coming due. Experts also say that people are holding on to their properties longer than they had originally intended to avoid selling at a lower price or at a loss. It’s no longer possible to finance property with short-term ARMs and plan to sell before they start adjusting. Now, experts say, they have either have to refinance or manage their current loan adjusting, which means the interest rates and payments will go up.
Another consideration is the climate in your local market. When you’re looking at the doom and gloom in the news, keep in mind that you are often being presented with very generalized national averages, or the focus is on the more distressed markets. The majority of recent foreclosure activity has taken place in a handful of markets with Nevada, California, Arizona and Florida topping the list. These are regions where a substantial amount of real estate was purchased with risky ARMs with the intention to “flip” the houses in the short term. However, South Carolina real estate trends are different - investors typically invest for the long-term.
A problem facing our area is that such a large number of people who want to buy property and move here come from troubled markets such as Michigan and Ohio where it is difficult for homes to sell. Local realtors are finding that their clients are taking less than what they wanted for their home because they are not willing to wait to move to the Lowcountry.
Markets fluctuate, so why not make your move now while prices are low and interest rates are favorable?
