12 Most Widely Believed Myths About the Real Estate Crisis
Everyone listen up very closely as I have 12 very important truths you need to hear. I have been in the mortgage industry 18+ years and have seen the up and down cycles before. What I see happening to real estate values currently may just be the tsunami that many financial experts predict is looming.
You can call it a recession, a depression, a double dip (not sure we ever got out of the first dip) or what have you, out of control housing values led us into this economic crisis and real estate is going to have to lead us out. And by the way, those job reports, housing starts, consumer credit stats and other propaganda that gets tossed out to the American consumer…. well, you know what they say about statistics.
This is not the news you want to hear, but for most parts of the country, this is the truth every American consumer must know regarding the 12 Most believed Myths about the real estate / mortgage industry and how it relates to our economy.
1. Housing values continue to decline
Yes – there are pockets throughout the country where values have held their own, even increased, but when you look at the country as a whole, property values continue to decline.
2. Those who led us in must lead us out
Pretty simple if you ask me. Just ask anyone you know that lives in the state of Florida, California, Michigan or Nevada if their house is worth more this year than last year or even last month for that matter. Those states led us into the property value bubble and I believe are the number one indicator of when relief is headed our way.
Let’s take a gander -> SunSentianl.com “South Florida home values fell 12.8 percent in the first three months of 2011 compared to the same period a year ago”
3. Unemployment statistics are misleading
Check this out. You would think unemployment statistics are derived from people filing claims for unemployment statistics right
? … #Not The US Government conducts a sample survey of 60,000 households. This my friends is what our leaders deem representative of the entire United States population.
Ever heard of the term Underemployment? How about the business owner who for years was accustomed to a six figure plus income but was forced to close his doors due to the economy and hopefully found work at a rate of pay only 30 – 50% less than years past. This person is not counted as unemployed yet may as well be as they fall further and further into debt every month.
4. Income is declining
Once again, I really do not want to hear about any statistics. If you want a good measure of where yearly family income is trending, ask your friends and family if they will make more money this year than last year….. heck, ask yourself. Look at how income is trending over the past few years over a group of say 5 or 10 of your friends and family.
5. Credit is declining
It goes without saying that a major requirement when applying for a mortgage is maintaining good credit. Oh my bad… we are talking mortgages in the year of 2011… I meant to say excellent credit. Well I got news for you, the credit scores I see today compared to credit scores I saw a year ago are worse. No credit, no house, no home sale… property values continues to decline.
6. Underwriting Guidelines keep getting tougher
Most agree that before a real estate recovery is even a thought, property values must first hit bottom. In order for property values to hit bottom, homes must begin to sell. As underwriting guidelines continue get more stringent and approvals continue to become more difficult, homes continue to remain for sale as the pool of credit eligible home buyers shrinks.
7. Regulations have decimated the mortgage banking industry
If you happen to know ten people who work in the mortgage banking business I would say odds are seven of them have changed careers. Regulations imposed by the government has made the mortgage broker all but extinct and is forcing many mortgage bankers to rethink their reis/reward exposure. It is very possible that within a year or so, if you want a mortgage, you will have to call one of the big banks and your loan advisor may likely be sitting at a phone bank somewhere offshore.
8. Strategic Defaults are on the rise
Just in case you have not heard the term “underwater” used in context with the real estate biz this is what it means. Your house which you paid 500K for in 2006 and took out not just a mortgage on but a home equity loan as well, is now worth 375K. Problem is you owe 480K on it. That is what we call “upside down”. As home owners crunch numbers and realize that it could take up to 10 years to simply break even and continue to observe property values in a decline, they begin to form a business decision and more and more are choosing the strategy of simply to stop paying their mortgage. This is what is known as a strategic default.
9. Foreclosure statistics are wrong
I have pulled credit on clients who have not paid their mortgage for months, sometimes even a few years, yet the bank does not report them as late. Hmmmmm…. I think in accounting terms that might be called cooking the books. What the actual percentage of homeowners who are over three months past due on their payment but not being reported as 90 days plus delinquent is anyone’s guess, but these are real numbers that do not get counted in the statistics and therefore skew the real environment of how vast the foreclosure crisis is. Click here to see where your state ranks on the foreclosure heat map.
10. The eligible borrower pool is shrinking
Seems very simple to many of us. When homes begin to sell is the signal the bottom has arrived. So lets sell some homes right? Not so fast. Let’s take a look at the pool of eligible borrowers. From this bucket go ahead and remove those with bad credit who cannot qualify for a mortgage to buy a house. And then remove homeowners who are underwater, can’t sell their home and are not considered “move up/scale down” candidates. The majority of eligible borrowers remaining are first time home buyers. Hey I have a great idea. Let’s now require that pool of first time home buyers to put 30% of their own money as a down payment.
Here is a quick example. Your son just graduates from college and lands a decent job. Housing prices are at 10 year lows and you want to help him take advantage to the market. No money down loans are all but gone with a few exceptions. FHA loans require 3.5% of sales price as a down payment. (They like to call that “skin in the game“) So a 200K house would require 7K of their funds in the deal, all of which can be a gift from family. Increase the requirement to 30% down, which translates to a 60K gift and little Johnny is not buying that house. But the real tragedy would be removing those eligible borrowers from the pool of qualified home applicants, further depressing home values as properties remain on the market longer.
11. Just ask your dry cleaner
I make a point of asking people who I consider critical industry indicators of where the economy is headed and how’s business going for them. I’m talking the mom and pop restaurant, the local nursery, the car wash and pretty much anyone else who deals with consumers and relies on an exchange of cash for some type of product or service they provide. My favorite economic temperature generator? – Ask the dry cleaner. I have been told that more consumers are abandoning expensive suits and dresses at their cleaners because they don’t have the disposable income available to pay the bill.
12. The economy has no prejudice
For those of you who believe that the real estate and foreclosure crisis is focused on inner city, lower income housing you better wake up. I am noticing more and more higher end homeowners (these guys are the business people and therefore think like business people) strategically default on their mortgage because it just doesn’t make good business sense to continue to pay. I am talking about people I would have never imagined in a million years would even consider walking from their obligation. As these defaults become more relevant the real estate crisis will deepen.
*A mortgage is a risky investment, both for consumer and bank. Each party understands that when signing the deal. Never allow a lender to tell you you have a moral obligation to continue to pay on time.
There are strong arguments for what caused the real estate bubble. Truth is, everyone from the investemnt banker, to the hedge funds, to the underwriter, to the real estate agent, to the appraiser and even to the consumer who engaged in bidding wars contributed to this mess.
So listen up all you finger pointers who claim they didn’t overspend and the government should let the crisis run it’s course. Understand this. Every time a house sells at auction for 5%, 10%, 20% less than the last comparable sale in your neighborhood sold for, your house loses that much value as well. Yes, your property could fall underwater regardless of how perfect you pay your mortgage on time or how you don’t overspend like so many did. We are all in this together and the finger pointing of who caused the mess has got to stop.
Featured image courtesy of respres licensed via creative commons.