Last Week’s Ugly Economic News Reveals Bright Spots
Last week, a media storm took place with the large drop in existing home sales. The drop of 16% seemed to shock everyone who was predicting only a 10% decline after the expiration of the initial home-buyer tax credit. Right after this, the numbers came out on new home sales, which painted an even bleaker picture. Only 23,000 new home sales in December, tying the low set in 1966. Then, Fannie Mae reported a sharp rise in delinquencies showing 5.29% of borrowers were 90 days past due on their mortgages. With such an ugly week, the words; “double-dip” started creeping into everyone’s vocabulary again.
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I’ve seen a slew of blog comments over the last week with people projecting a new doomsday in the next 6-24 months. Actually, even saw someone predict an additional 30% decline in home prices over the next 3 years nationwide, with rents declining by the same amount. I even caught myself talking about a “rude-awakening” coming for many when the Fed stops buying the Mortgage Backed Securities (MBS).
As I think about all this news and data, I can’t help to think about all the positive happening in the market right now. Let’s take the “biggest drop in 40 years” with the existing home sales numbers. What did they expect after the frenzy to get the first-time buyers set up for closing before the tax credit expires? Only at the last minute did the Feds extend it. Of course there would be a huge rise since everyone was expecting it to be gone. How about the fact the number of home sales was 15% higher than the previous December? Does the percentage drop month-over-month really matter when the overall trend is improving?
Median home prices rising received almost no press. What fun would it be to point out that prices are actually rising?
I’m sure this is due more to over-correction than nearly anything else, but isn’t a rise in housing prices worth standing up and cheering for? Several cities even posted gains in 2009!
Next are the ridiculously low new home sales at just 23,000. Well, also important to note, is the builders haven’t built many lately, and thus the inventory is at a 40 year low. Many builders went out of business or haven’t been able to get funding for new starts. However now builders are filing for permits once again, as my last blog reported.
What about the seemed explosion in Fannie Mae delinquency with over 5% of loans underwater? It’s pretty hard to say anything positive about this number. But while we’re putting a positive spin on numbers, how about the fact this is a lagging indicator? This number will likely be as high or higher for the next few quarters, as foreclosures are peaking. So even if the good news starts coming in on the economy, you won’t see anything good coming from this number in the near term. Delinquencies seems to be tied directly to negative equity, and until home prices can show sustainable increases, delinquencies will remain high.
Now, as for the “rude-awakening” once the Fed stops buying mortgage backed securities I was talking about. This was directed at those real estate investors, professionals, and entrepreneurs who haven’t thought ahead in regards to their reliance on certain types of loans. I know many wholesalers whose lifeline is a non-seasoned rate-and-term refinance. Usually they sell the property on a short term construction loan or hard-money loan, expecting the buyer to refinance out. I call this the “limited-investment” strategy. The non-seasoned rate-and-term refinance makes up for as much as 100% of the wholesaler’s buyer strategy. Without it, many will crumble. The good news here is what? You can focus on finding stronger buying clients who can pay cash for homes or are able to do traditional 20% down scenarios. The traditional investment loan has changed little in the last 5 years. Unglamorous and boring, 30-year fixed rate loans to strong borrowers with 20% down or more, remain a rock despite the economy.
My advice? Create a higher quality of real estate business. Find quality buyers who understand having skin in the game is the new normal. Prepare for a another long year by saving and reducing your businesses expenses. This is great time to renegotiate contracts and leases. The economic data is going to continue to be mixed for some time. Lenders will come and go and the Fed will stop buying many of the loans. However quality business rarely goes out of fashion.
Graph Source: Calculated Risk