Real Estate News & Commentary

Last Week’s Ugly Economic News Reveals Bright Spots

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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

    BawldGuy Talking
    Replied over 9 years ago
    Regardless of what may or may not be in our near/mid-term future, your advice will save many from unnecessary hard times. Fundamentals never change, though they’re patient when mocked. 🙂 Good to hear from another Old School grad. .-= BawldGuy Talking´s last blog ..Something New For the Weekend =-.
    Ryan Hinricher
    Replied over 9 years ago
    Jeff, thanks for the positive feedback. The fundamentals are what remain constant. I found myself caught up in the hype and crazy lending with everyone else. Glad to see the basics coming back into play. PS: Saw the savings rate shot up to 4.8% today! Ryan
    Neil Uttamsingh
    Replied over 9 years ago
    Hi Ryan, It is always funny how the media dwells on the negative things and never reports on the good things that are happening. In you article you mention that when median home prices rose, there was no coverage by the media on this. In my mind, this is big news that should be covered. Then again, as we know, the ‘media’ always dwells on the negative things. Negative things make headlines after all! Regards, Neil. .-= Neil Uttamsingh´s last blog ..Robert Kiyosaki — Friend or Foe? =-.
    RJ Baxter
    Replied over 9 years ago
    This is great commentary and your insight on working with borrowers who understand they need skin in the game in today’s economy is right on. This is also applicable in the owner-occupied realm as we are seeing less and less ability for home buyers to qualify if they don’t have a down payment.
    Ryan Hinricher
    Replied over 9 years ago
    Yeah, I just dealt with a flip deal which the buyer needed multiple down payment assistance loans. I finally killed it because in the end I don’t think the buyer could afford once I caught wind of a second down payment loan. Thanks for your feedback, RJ
    Richard Dale-Mesaros
    Replied about 9 years ago
    Hi Ryan, I kind of disagree with your suggestion to be finding better qualified buyers – pretty much all of the buyers we’re getting are first time home buyers who need to work with gvt. programs that allow hardly anything down and seller consessions toward closing costs. We’re selling this type of inventory, because that’s what’s working/moving in New Hampshire right now and we can get the buyers financed, even if it does mean extra lender-requested repair items and a few other hassles. We’d be sitting around for a long time if we waited for the 20% down brigade! We’d rather help buyers get in and move on to the next deal, quickly. I do feel though, that the recent fallout must have been positive in terms of companies being more efficient and frugal, which makes for a stronger economy…. Warm regards, Richard 🙂 603 254 6197