Summary
Much has happened in the credit markets in the past several years and many things have contributed to the current economic downturn. The road in the rear view mirror is littered with failed policies from the government and from private segments of the econimic system. One thing is certain. The start of this current economic cycle, the tip of the spear that created this crisis, is the collapse of the residential mortgage market. This situation manifested itself in changes to the marketplace spurred on by changes in the Congress and Senate during the 2006 election cycle. During this time the Democrates took control of both sides of the ails. Barney Frank was named head of the House Budget Commitee and Chris Dodd was named head of the Seante Banking and Finane Committee. Both of these men had a major effect on how the morgage market changed from years past.
Analysis
Much has happened in the past several years and many things have contributed to the current economic downturn. The road in the rear view mirror is littered with failed policies from the government and from private segments of the economic system. One thing is certain. The start of this current economic cycle, the tip of the spear that created this crisis is the collapse of the residential mortgage market. This situation manifested itself in changes to the marketplace spurred on by changes in the Congress and Senate during the 2006 election cycle. During this time the Democrat’s took control of both sides of the aisles. Barney Frank was named head of the House Banking Committee and Chris Dodd was named head of the Senate Banking and Finance Committee. Both of these men had a major effect on how the mortgage market changed from years past. Barney Frank had the most immediate impact on these changes in the residential market. Franks teamed up both professionally and personally with an executive in Fannie Mae's Regulatory Council. They came up with a number of new mortgage products and underwriting guidelines that they were able to push through both FNMA's Management as well as the House Committee.
A significant emphasis on these new products included expanded stated income standards, low documentation guidelines, Alt-A programs with low teaser rates to help increase approval percentages, 40 year amortizations and interest only mortgage loans to help in the payment qualification ratios were also enhanced. One of the biggest messages that went out from both Fannie Mae and Freddie Mac, with the backing and support of the House and Senate Banking Committee Chairman, was that these two quasi-government agencies would buy up any new mortgage loans that the banks, brokers and mortgage companies could book. So the race was on. Real Estate brokers went full speed ahead. New Real Estate brokers were graduating as fast as they could be certified. The FI's saw new loan and customer growth potential and the secondary market folks helped their lending with new mortgage origination strategies and secondary market sell forward strategies.
The result of this new activity was the next housing boom. Real estate values grew in leaps and bounds. Some areas of the country, like California, Arizona, Nevada, Florida, the Carolina’s and some segments of the Midwest saw 20 to 75% housing value increases within 12 to 18 months. Even though things were booming there was a small cry in the wilderness that this balloon would pop. However, housing inventories remained low. Existing home resales were on and off the market in one day. In some cases they were sold sight unseen in some areas of the country like California where I experienced this first hand. New housing construction sales experienced the same frenzied pace. In the background, there were those who had seen this kind of frenzy in the past and knew that, as in all things, what goes up must come down.
The beginning of the end came initially with a small pop of the balloon. Interest rates inched up and inventory levels started to increase. Everyone started to think about if this was the end of the boom. So with that thought and rising interest rates and increasing inventory the slowdown had begun. However by that time the number of existing and new home sales across the country had reached record numbers. All these new mortgages to people who had never owned a home, those who upgraded from their existing home, those who became speculators, those who bought a second home for vacation or for childrenwhere now on the books. A significant percentage were booked and sold through the secondary mortgage market with Fannie Mae and Freddie Mac buying a good portion of them. Of course there were others buying up portfolios as well but Freddie and Fannie had done what they said. They would buy up everything that they could. Since the collapse of the real estate markets due to high delinquencies and rocketing foreclosures caused by consumers claiming higher income than what they actually had and not having the stability or liquidity that they claimed as well as a number of other issues started the ripple effect into the secondary market. And the rest is already history. Housing values became quite unstable and "reality values" kicked in.
Based on information from the National Association of Realtors and the National Association of Home Builders, the downward adjustment of median housing values for new and existing homes show a wide range of downward price adjustments depending on the geographic segments of the country. Based on the median home values around the boom time frame of 2006 and 2007 to the 4th quarter of 2008, the median downward adjustment for new home prices shows an 11% drop for the north-east, 14% for the mid-west, 18% for the south and 39% for the west coast. Not surprisingly, the most significant downward move of median home prices took place in existing home values. The north-east shows a 21% reduction, the Midwest a 21% reduction, the south a 16% drop and a 44% drop for the west coast. While I did not have the 1st quarter of 2009 number or the monthly values for April it is a safe assumption that the median values for existing and new housing has deteriorated even further as we still search for a bottom to this cycle. Needless to say the drop in unit sales also was quite significant.
So, the big question is....Residential Real Estate issues got us into this down turn and Residential Real Estate will take us out of the cycle. But, how will that happen? Well, residential real estate will lead us out of the bottom of this cycle the same way that it always has in the past. The current drop in real estate housing prices, whether it be in existing home sales or new home construction, will find a bottom. As job losses stabilize and the consumer and commercial markets start to show the slightest trends that indicate an upward tick, people will slowly start to explore either a move to a bigger home, or an investment property or a downsize scenario.
The current level of new and existing housing value that is out there will spur on the public. I have written in previous articles about how “Fear” still remains out in the market. I speak of the “Fear” as being a powerful motivator in all things. Even in the recent new push for liberal values, sound conservative fiscal principal’s still drives a significant majority of the home buying population. As rational thought and fact based information starts to emerge out of the fear of the unknown you will see the real estate brokers becoming more creative in their marketing plans. Discounted broker fees, seller assisted closing costs and other sales incentives and programs like “Buy a house and get a car free” is one of my favorites. We also see pool installations in certain parts of the country coming back and college tuition incentives are being used to spur sales. It is these creative endeavors, the dissipation of fear and the bottoming out of housing prices that will provide the counter weight which will help drive the buying cycle back up to where it was at the last peak in 2006. We will then be ready to do it all again….This time, maybe a little bit smarter than where we are now.
