Oh Ok, I Feel Better Now /sarcasm
While I don’t expect the general public to fully understand the size and scope of the current mortgage and real estate meltdown, I was hoping that at least the professionals from these industries would. My hopes are unanswered as evidenced by this letter to the editor of my local newspaper. The letter was submitted by a realtor. The emphasis is mine.
Why gloom and doom on housing market?
News-Times Staff
Article Last Updated: 11/12/2007 05:07:16 AM ESTAfter remaining silent over the daily bad news about the housing slump, the front page article, which once again shouted the sky is falling, finally got to me. The statistics were inaccurate. Using the MLS, there were 132 closings in the greater Danbury area in October of this year, not 88.
The current market is down, no argument. We have become accustomed for about 10 years to a seller’s market and coming down to earth is hard.
I became a Realtor in 1988 when the inventory was high, buyers were scarce, and interest rates were in double digits. Real estate is cyclical, and the most recent cycle outlasted all expectations.
The problem we are facing now is that the driving force in the market, moving up, is no longer in play. The 100 percent mortgage financing that was so plentiful has virtually disappeared, and the requirements for qualification are changing daily.
On the bright side, there are buyers, rates are low, and the inventory is pretty good. The smart people are figuring this out, but it would be so helpful if the media would look at all sides for a change.
If you keep on forecasting gloom and doom, that’s what you will get. The truth of the matter is, if you buy a home today, you are well positioned for the next surge in pricing.
How about some positive news about home ownership?
Pat Linnell
WOODBURY
The problem we are facing now is that the move up market is no longer in play? Give me a break or pass the Kool Aid.
The truth of the matter is if you buy a home today, you are well positioned for the next surge in pricing? Sure and if you keep saying tomorrow is Christmas, eventually you will be right.
I suppose, according to Realtor Linnell, we are supposed to ignore facts presented by the likes of Hartford Business dot com.
Reports published last week by Boston-based Warren Group reveal that the tide is turning in the Nutmeg State. A double-digit decrease in home sales along with an alarming number of foreclosures — at 2,948 — in Hartford County alone, reflect the state’s fractured housing market.
Statewide, there have been 12,575 foreclosures, with New Haven County hardest hit with 3,914 foreclosures.
While home sales have plummeted in the past, state officials do not recall when the number of foreclosures has been so great.
“We’re concerned because this is not a typical situation,” said Howard Pitkin, commissioner of the state’s Department of Banking. “This is not something that has happened frequently in the state, and we need to address it.”
The foreclosure process is lengthy one. There is a great deal of time between the initial filing and the actual sale of the property being foreclosed upon. It is when these properties sell, at steep discounts to market, that they will begin to affect the prices of homes not in foreclosure.
In this context, the worst is yet to come from a home value perspective and anyone buying a home now will only see their value decline as these thousands of foreclosed properties hit the market and sell.
Not only does this add to the glut of inventory, it adds thousands of properties that will sell at depressed values. This is only half of the equation, the supply half. On the demand side of the equation, it gets no better.
As the real estate “professional” states, subprime mortgages and 100% mortgage loans are gone. Common sense tells you if the programs are gone so are the buyers that needed them to qualify for home financing. Add to this the prime and alt “A” mortgage market feeling the subprime pain and you now have “A” paper borrower’s having their ability to borrow and buy severely impacted.
This means that there is less demand for the properties on the market, foreclosed or other wise. Obviously, the supply/demand equation on Connecticut Real Estate does not bode well for Connecticut property values. As such, why would anyone be buying now who didn’t have to?
Here is another snippet from the article.
There are an estimated 71,000 subprime mortgages in Connecticut worth approximately $15 billion, and it is possible that up to 8 percent of those loans are delinquent, he said.
Lets do some math. Eight percent of 71,000 subprime mortgages is 5,680. Eight percent of $15 billion is $1.2 billion. So we are to believe that 5,680 potential foreclosures with a market value in excess of $1.2 billion is only a blip on the real estate value radar? The realtor’s letter would have you believe that this is business as usual.
Linnell draws a parallel among the late eighties market and the market of today. However, in the late eighties, there was no political witch hunt affecting the mortgage industry. In the 80’s, 182 lenders, prime and subprime, hadn’t disappeared from the face of the earth. In the eighties, foreclosures were not running at a pace to anything similar today. In the eighties, mortgage programs were beginning to proliferate not shrink by almost half. It’s plain to see that the comparison of the two markets is ill conceived.
Now here is what I believe is a more appropriate perspective of our economy and the real estate market.
In the 1920s, widespread use of the home mortgage and credit purchases of automobiles and furniture in the U.S. boosted spending, but created consumer debt. People who were deeply in debt when a price deflation occurred were in serious trouble — even if they kept their jobs — and risked default. They drastically cut current spending to keep payments on time, thus lowering demand for new products. Furthermore, the debts grew when prices and incomes fell 20-50%, but the debts remained at the same dollar amount. With future profits looking poor, capital investment slowed drastically. In the face of bad loans and worsening future prospects, banks became more conservative in lending money. They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed, and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.
You will find this excerpt in Wikipedia’s search result for “Great Depression”. Which scenario do you see most similar to today’s circumstances? Ah but not to worry, because as the realtor states, tomorrow is Christmas. /sarcasm.