Things to Know About Real Estate

Who is to blame for this current state of affairs? The media seems to like to point the finger at the mortgage industry and specifically at mortgage brokers. As a Mortgage Broker, myself, I know that brokers had very little to do with the mess that we are currently seeing. The media (and certain regulatory bodies) say that brokers arranged the loans that are now in default, so we are to blame. However, there are far too many other players in  this game… players that stand to make a lot more money than a lowly broker. Who is to blame? The Broker? How about the Realtor that put them in the max house they could afford? What about the Mortgage Lender that offered the loan as a product for brokers to sell? They can only offer a product that they know will be backed by the investors, so ultimately the investor (the very player that has incurred the most losses) created their own “poison-pill.” They agreed to back these very high risk loans (at the advice of fund managers and bond traders), but when the foreclosures began to mount up, they were the first to pull out of the game (and file suit against the Mortgage Lenders to try to make them give back their profits in order to off-set the Investors’ losses.

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The main causes are high foreclosure rates, excessive losses to the funding sources, a decline in property values (in several large markets), a much greater number of “exotic” mortgages held by consumers, and the adjustment of many ARM loans to levels too high for homeowner’s to maintain. You may be wondering what is an “exotic mortgage”? This is the term that federal regulators have come up with to describe both Interest Only mortgages and Negative Amortization mortgages. Interest Only loans have a time period where you only pay the interest of the mortgage- The monthly payment is less than a normal mortgage, however the balance of the loan remains the same. A Negative Amortization mortgage goes a step further by offering the borrower the opportunity to make an extremely low payment each month, but the difference between that low payment and the actual amount of interest on the loan is added to the balance of the mortgage. Basically if you make the cheap payment, you end up owing more than where you started.

The Cause:             All of the causes above could really be expressed as one cause, but the media likes to break them up because it makes for better headlines, and they can talk about a different cause every day of the week. I’ll use an example to illustrate the basic chain of events that has caused a huge mess- Meet John and Jane our homebuyers/homeowners. John and Jane are shopping for a home in late 2005. They employ a real estate agent to help them. Eventually John and Jane buy the absolute biggest house that they can afford at the advice of their Realtor; they use a 100% Interest Only (Exotic) Loan to be able to afford it; they had some credit issues to start and no savings so their loan is a “non-conforming” loan; they initially got the loan with intent of refinancing it before the adjustment date; during the 3-yr fixed period on their loan, the INDEX that drives the adjustment increased over 4%; the public sees that rates are increasing, so home sales slow down; John has some bad luck and gets laid off his job; the ADJUSTMENT DATE comes… This is were it gets ugly- Their interest rate increases by 4% and there payment changes to a PRINCIPAL and Interest payment rather than an INTEREST ONLY payment. During that 3-yr period, John and Jane only paid the interest on the loan, so they own the same principal balance as when they began. Since they got a 100% loan, they, in effect, owe 100% of the market value of the home. Add to that the fact that sales have slowed in their area; houses sit on the market; sellers lower prices to get rid of them; the value of John and Jane’s home has just decreased. This scenario happened millions of times across America as every joined in the housing boom that carried our economy through out the recent recession.

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During your busy schedule, you may not have had the opportunity to keep up with everything that has occurred and that is forecasted in the housing and real estate industry. As a homeowner or potential homeowner, many of these events will affect you, be it through changes in the value of your home, or the availabilty of mortgages, or possibly your financial situation if you work in a housing industry-related field. The housing industry and its many related sub-sectors make up a huge portion of the national economy- banking, building, appliances, steel, office leasing, equipment leasing, equipment manufacturing, highway and road construction, local government, schools… the list is endless. All of these industries depend heavily on how many houses are built as well as how many houses are sold. Let’s start by looking at the mortgage industry since it has been making headlines lately.

Since late 2006 a total of 167 major U.S. lending institutions have closed their doors. These companies range from very large operations with 100+ offices across the U.S. employing over 7,500 people, all the way down to “mortgage divisions” of larger parent companies. The majority of the companies that have been forced out of the industry have been “non-conforming / sub-prime” lenders and “Alt-A” lenders. These are two classifications of lenders that basically offered mortgage products that fit consumers with either credit challenges or non-standard income or employment situations. When these companies closed their doors, the loan products that they offered disappeared as well. The types of mortgages available today are drastically different than just one short year ago. In upcoming posts we will look at some of the causes…

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This year has been a roller coaster ride for the mortgage and housing markets. Early predictions were for a drastic increase in mortgage rates and a bursting of the housing price “bubble”. To a certain extent these predictions came true, but as the year closes out, both mortgage and housing markets are regaining some of their lost steam. Locally, in NC, we felt little or no effect of a “bursting bubble” as property values continued to rise throughout the year. NC actually saw a major invasion from homebuyers who were fleeing the areas that were experiencing the “bubble”, and these buyers have been willing to pay top dollar for homes in NC because they are accustom to doing so in their previous markets- CA, NY, FL.

Predictions of an expansion and recovery in the US economy was a major factor in the increase in mortgage rates for Conventional Loans, while early delinquencies and post-foreclosure sale losses by investor drove up rates for many Sub-prime Loans. As the US economy did not respond as predicted through the year conventional mortgage rates settled back down to market-driven levels as investors gained confidence that bonds (which back conforming loans) were a much safer investment than the stock market. The sub-prime market had to reap what was sown during the recent mortgage boom. Over the years, sub-prime lending rules had become much less restrictive as Wall Street had an insatiable appetite for non-traditional loans- this was fuel largely again by the dramatic increase in home values in many major markets, and the US populations us of home equity to carry them through the slow economic times. Wall Street investors were willing to accept the losses due to foreclosure simply because their were very few actual losses in a market where values were increasing 15-20% every year. However, as values stalled and in some cases dropped, and at the same time delinquencies increased due to poor homebuyer education and adjustments to interest rates, the losses to investors sky-rocketed. To feed Wall Street’s appetite, mortgages were all but “given away”- Home-buyers had little or no cash invested in the home and had long histories of poor credit and cash-flow management; it was inevitable that they would be delinquent on a mortgage that greatly increased their monthly debt-load.

As we close out the year, we see conforming loan qualifying rules tightened in some areas, yet expanded in others, as lenders work to mitigate losses due to a slower rate or appreciation, but at the same develop new options for the world we live in with the addition of 40-yr term loans and expanded options for interest only loans. Rates are still at very low levels, and will likely remain so until the economy makes a major turn around. The sub-prime loan market, on the other hand, is in the middle of a major shake up, as many large sub-prime lenders are closing their doors and others are rushing to find different lending options in order to generate revenue. Sub-prime lending rules will see a dramatic tightening in the next 6-months in response to the huge losses incurred by Wall Street investors. This will limit the available credit sources to many lower income households, but may ultimately be a much needed answer to the on-going ethical issue of “Do you give someone a mortgage just because they can qualify for the mortgage?” In the end, 2006 had many ups and downs, but as a whole was a prosperous year for most homeowners, homebuyers, and companies associated with the housing market- and just as in past years, the housing market has continued to carry the US economy and prevent a major recession.

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This is truly one of the biggest choices a homebuyer can have. Both sides have benefits and drawbacks. It will ultimately come down to what you (as the consumer) desire most.

Some of the pros of new construction are as follows:

• It’s a brand new house: you will have little in the way of upkeep or repair
• You will have the piece-of-mind of a home warranty
• You can buy relatively cheap per sq. ft compared to existing homes

The drawbacks:

• The neighborhood will not be as pleasing to the eye for quite some time; small trees, basic landscaping, on-going construction
• Risk that the neighborhood may not “take-off”- Values of property can stand-still or even drop as builders try to find new buyers

The benefits of existing homes:

• Character in the home- age brings a lived in look that sells
• Mature neighborhoods are sought after- large trees, mature landscaping, etc.
• Amenities- most older neighborhoods have dining, shopping, etc. built around them in response to the neighborhood

Some of the drawbacks:

• An older home may require more upkeep and repair- systems get old and breakdown- be prepared to spend a little more in the first few years than with new construction
• Most older neighborhoods, because of the benefits, will carry a higher price tag
• Older homes may also be behind current design trends- For example- try to find a large walk-in closet in a home built in the 1960’s- or a spacious bathroom with double vanities- These are common fixtures in new homes, but they were rare luxuries in the old days

The key to choosing is to really evaluate what is important to you- this includes the home, the yard, amenities, the time that you have to spend on your home, and many other factors. Only then can you make the decision for what it is that you are truly looking for in a new home. I highly recommend enlisting the services of a Realtor. They help you quickly match your wants with the reality of what is available.

Call me if I can help in any way.

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Like many areas of the country, Charlotte and most of North Carolina have had great increases in property values. During the recent economic down-cycle, many Americans turned to real estate as a safe investment. This growth in demand with a limited supply available cause prices of real estate to move upward quickly.

In step the “speculators”- speculators are investors that purchase real estate with the goal of making a quick return. Their rapid moving of property can cause the value of real estate to increase rapidly- sometimes beyond reasonable points. These investors along with huge amounts of other investors into the real estate market have lead many to believe that we are experiencing a “housing bubble.”

A “bubble” occurs when the price and/or value of real estate is artificially inflated beyond what it is really worth. As in the literal sense, a bubble is a very fragile thing. Many housing experts and economists feel that this bubble will break and the values of real estate will adjust back to normal levels. When this occurs, many people could be left with homes that they owe more than the property is worth; investors hoping to make a quick sale may be left with a property that they cannot afford to keep, but they cannot sell either.

What does all of this mean for the Charlotte Metro and NC housing markets? There is good news- The NC Real Estate Commission (NCREC) has recently reported that independent studies of the NC real estate market show that we may be in the “bubble-proof” market. Why? A value bubble is created when the demand for property exceeds the supply. This is the case in many well-developed areas- Coastal Florida, Southern California, Metro NY, etc. North Carolina, on the other hand, has had plenty of room to grow. We have experienced strong demand, since being noted as one of the best places in the US to call home, but we have also responded with a strong supply.

This is actually an ideal situation (and ideal situations attract even more buyers) as we have seen steady, yet realistic growth in property values. So, when the bubble breaks (and it will) NC and the Charlotte market may prove to be “bubble-proof.”

So get out there and buy some real estate- You will be pleasantly surprised at the security of your investment. Call me if I can help in any way.

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