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July 16, 2008

An Optimisic Take on the Real Estate Market

This is probably one of the most informative articles I have read in a long time about the state of the real estate market. It’s dense but well worth the read. The overall tone is optimistic. The bit below in italics is verbatim from the the article. I thought it was interesting that a clear distinction was drawn between our current crisis and The Great Depression.

Today’s housing bust IS unique in U.S. economic history. It began in good, not bad, economic times, and has proven to be national rather than regional in scale, with markets around the country detonating like Chinese firecrackers between early 2006 and mid-2007.

With the benefit of hindsight, one can discern a concatenation of developments that made the latest cycle almost inevitable. In the aftermath of the 2000 stock-market bust and the 2001 terrorist attacks, and amid heightened fears of deflation, the Federal Reserve drove short-term interest rates to near-historic lows and flooded the nation’s financial system with money. Cheap funding spurred a surge in home-buying, and drove the home-ownership rate to a peak of 69% of all U.S. households by 2004, up from 64% a decade earlier.

Prices in many areas began to go parabolic in ‘04, at the time the Fed began to raise rates. Affordability became a problem in some markets, and cash-out refinancings began to slow. On Wall Street, however, where the securitization of mortgages had become a huge profit center, the demand for new mortgage product was unrelenting. Mortgage brokers and other loan originators were also getting rich off the business, and thus were eager to oblige. By 2005 the mortgage industry had began churning out new “affordability” products that featured low “teaser” rates in the early years of a mortgage to keep monthly payments low. Long-sacrosanct down-payment and family debt-to-income requirements were jettisoned. Other products enabled borrowers to repay interest only in the early years of a loan, while so-called option ARMs added the unpaid portion of monthly interest to the principal balance.

Come 2006, many lenders were scraping the bottom of the barrel to find new borrowers, some of whom, by fibbing about their annual income and net worth, often with the connivance of mortgage brokers, secured “liar loans.” As greed gave way to fraud, both borrowers and lenders came to believe that ever-rising home prices would cure any defects in the underwriting process.

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According the article, home prices are expected to steady by year end, with the pace of foreclosures slowing shortly. The feeling is that most of what was destined to foreclose has already done so and the banks have taken their biggest lumps already.

A couple things that I am taking away from the article:

1. If you are looking for a deal make one now.
2. If you are investor or have a desire to be a landlord it is probably a good time to investigate some rental property because lending guideline are going to tighten up and banks are going to become much more strict in their underwriting process. This will mean there a fewer people out there able to buy for themselves and more people out there looking to rent.

On that note, check out 3215 Gravois and 3880 Juniata.
Both are excellent rental properties.

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