Give Consumers a Break! |
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Give Consumers a Break! The Federal Reserve continues to keep the housing market in handcuffs with its sustained High Interest Rate policy. The longer they delay in cutting rates, the more adjustable rate mortgages will reset to higher payments, the more foreclosures we will see, the less consumers will spend, the more job layoffs we’ll see and the greater chance we will experience an economic recession. Without some swift and more abrupt action by the FED, we will continue to see the entire economy slow and very likely move into a recession. Where’s My Calculator? The writing has been on the wall for some time. Many have been touting this for weeks, others for months: The Fed must lower rates! Yet the Federal Reserve’s leadership has persistently stated, “We don’t see it in the data.” It has become apparent, that without the proof, the Fed will not act. Everyone knows that two plus two equals four. Yet the Fed continues to scramble for its “calculator” to prove these numbers, and the market is getting away from them. They are missing the “indicators” in search of the “data.” Simple surveys of investors and homeowners feeling the pinch have provided the “indicators” for months. The problem is the current Federal Reserve does not do business this way. It looks through the rear view mirror to see where we’ve been, not through the windshield to see where we are going. When one takes his eyes off the road, an accident is likely. The Fed needs “economic data” in order to act, so it can justify its actions if incorrect.
An initial dose of “proof” that the Fed has been looking for arrived on Friday, September 7, 2007 when August job numbers surprised everyone. Jobs were expected to have a net increase of 111,000, yet fell by 4,000. Oops! How did that happen? The stock market consequently tanked 250 points as fears of a recession mounted. Mortgage default continues to increase with sub-prime as well as prime borrowers. Much of the prime borrowers (those with credit scores typically above 660) who have given up on paying their mortgages are doing so on second home or investment purchases and not typically on their principal residences. There is less of a distinction with sub-prime borrowers, as many are simply unable to make payments of the property they purchased, in many cases due to the type of loan they obtained. The primary reason for default on second homes and investment property for prime borrowers is due to the fact that the property values have fallen, in many cases below the unpaid balance of the mortgage. Any rental income seldom covers the monthly expenses on the property, so the incentive to hold the property diminishes and certain owners opt not to continue to hold on any longer.
Owners not willing to hold on have been selecting one of two options: one is to foreclose, which drastically hurts their credit (for about seven years). The other is to short sale the property. A short sale is where the owner opts to sell and the sales price (less expenses) ends up being less than what is needed to pay off the mortgage. In such a case, the mortgage company may agree to accept a “short” payoff of what is owed them. 1) The owner cannot receive any cash from the sale. 2) Proof is presented that the owner does not have any other outside funds that can be used to pay the shortfall at closing. 3) A personal hardship affects the property owner (that the lender is willing to accept as a valid reason). The lender also considers their own alternative: a foreclosure. Since the average foreclosure costs a lender $60,000, it may consider shorting a sale in lieu of losing that $60,000 in the event the borrower ended up foreclosing. Short selling of houses is becoming more common nationally as a number of investors and homeowners are being squeezed on their properties. If you are in such a situation, seek competent advice from a real estate agent, an accountant and possibly a lawyer, as there are a number of financial implications, including damage to your credit. Holding property long term has always proven the best option, as prices have risen consistently over the decades. Downturns (such as the one we are now in) are very rare and have proven to be the best time to buy versus sell.
The $64,000 question, right? The longer the Fed holds rates steady, the less optimistic most professionals are. If the Fed had been lowering rates during the year, most markets would be looking very different than they do now. We could have had the “soft landing” that so many believed in. IMPORTANT: The length of downturn and the degree of “landing” will depend on what decisions the Fed makes regarding rates. If they do not lower rates, watch out. If they only lower by .25%, it won’t be enough. If they lower by .50%, it is only the first of several more. If they lower by .75% or 1.0%, we will likely see a nice injection into the economy and into the housing market that could turn things around much sooner. Bottom line, it is a balancing act.
For every loser there is a winner – two sides to the trade. Those who are in a position to buy real estate over the next twelve months will be able to secure outstanding prices. Sellers are motivated and lenders/banks are motivated! Buyers can capitalize on both at the same time and net an incredible price. This scenario has not been seen in decades.
2) tax benefits/depreciation; 3) equity build-up; and 4) cash flow, then you should be out looking for deals now and continuing to do so while the bad news is on the street. For once the tide turns positive, the deals will dry up.When you hear of lenders going under (New Century, American Home, CIT, Ameriquest and others) and when huge lenders like Countrywide, NovaStar, Option One and Thornburg are fighting for their lives to stay in business, you have to know that there is an opportunity out there. But remember, the “bad times” will not last. Once the U.S. government sets up some new program to resolve the current problems, or once the Fed lowers rates enough to turn consumer sentiment, more buyers will begin buying, the sellers will be less flexible, the lenders will be less motivated to deeply short sale property, and real estate prices will stop declining. The deals of today will be dust in the wind. And good luck trying to “time the bottom” – it’s next to impossible. There are great buys today if you seek them out.
To learn more about how to be buying some of the best priced real estate in SW Washington, we invite you to visit our website, www.NWIP.com or call 360-433-5187.
As foreclosures increase we will continue to see more renters. Their challenged credit will keep them from obtaining a mortgage and keep them in the rental market for some time. Additionally, lenders have tightened their borrowing guidelines, making it much more difficult for many to obtain a mortgage. No-documentation and stated-income loans are pretty much obsolete now. Many other programs are also cut back or eliminated. For those with good credit, YOU are in the driver’s seat as a buyer; don’t miss the buying opportunities today! By pulling the trigger and buying today, you’ll be setting yourself up for great investment wealth after the market recovers and gains strength again. |
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