Some say that lenders may be at fault for our tight Mortgage Credit crunch right now, and for all those poor people that got loans that were interest only or zero down, and are now underwater on the property because prices have fallen so much they can’t sell the home for what they bought it for.
It’s a lot more completed than that!
Let’s take a look at this from the perspective of two Realtors that have been doing business in the Seattle real estate market for about 20 years. First of all, a little over half of our business is working as Buyers Agents in the Seattle area. On average, we help about 25 buyers a year buy homes that amount to about $12 million in home sales a year. We also work with many sellers as well, and that balance helps us understand both the buying side and the listing side of the market. For the past several years the Seattle real estate market has been a very strong sellers market, but that all changed in September of 2007. The interesting thing however, is that Seattle home sales stayed strong despite a turndown in home sales and home prices in most all of the rest of the country starting about two years ago. The Seattle economy is strong, people are moving here, businesses are expanding and hiring, there is a short supply of good homes in the close-in Seattle neighborhoods, but the national news and uncertainty has finally affected our housing market here is Seattle. Recent numbers from the NWMLS have stated that prices in the Seattle area have fallen by less than 5% on average, and that the number of new sales has recently increased by about 2.5% over the past couple of months. This is all good news for our market but then why are people unable to sell their homes for what they paid for them?
In the words of our 15 year old daughter, Dah! They paid too much when they bought the home. Here is what we think has happened mainly since 2005 (well, it happened in 1989, 1995 and 1999 as well) in the Seattle real estate market: In the early spring of 2005 Seattle was in another “White Hot” sellers market. Inventories were very low and there were lot of new buyers in the market and some of these buyers were in the market for the first time because on new creative loan programs, others had moved here and many were being relocated here of a new job in one of those high paying high-tech businesses.
Now, with regards to home inventories, we think that about 3 to 4 out of every 20 new listings are actually good homes to buy. The rest maybe OK, but only if you can buy them at much reduced price. So what happened was we would see 7 to 10 offers on a really good home that was priced at say $500,000. Only one buyer would get that home and usually they had an escalation clause saying that they would pay about $1000 over what the highest offer was, up to a limit of say $510,000. OK, know you have 6 to 9 buyers that lost out on the house and they would then go after the next best house, but this time some one would increase their limit to $515,000 (because they don’t want to loose another home for just $5000). On and on this would go and then after about 3 or 4 times that "not to exceed" went form an extra $10,000 to $15,000 to $20,000 to $30,000 to $50,000 and sometime even $75,000 over the asking price. Then to compound the matter the new homes that came on the market were coming on at even higher prices because “the home down the street sold for $540,000", but it was actually only worth $500,000. Buyers just got completely carried away and unfortunately their real estate agent didn’t help keep them very realistic in many cases.
The next thing that was happening was that buyers would not want to get caught up in bidding wars anymore so they would buy homes that came on the market that were not holding offers to a specific date to encourage a bidding war. They would buy homes that were in bad locations and they would buy homes that were of poor building quality and design. These homes are usually very hard sell even in an average market. This is a huge problem when they go to sell. Some homes only sell during a “white hot sellers market” so if you are not in that “hot” market condition when you need to sell then you most likely can’t sell the house unless it’s a total bargain.
Now some of these people are really paying the price for making all these poor buying decision. If you paid $550,000 for a home that’s only worth $500,000 in 2006, and the market went up by only 3% in the first half of 2007, and then back down by 5% by mid June 2008, you are underwater, and again, we don’t think it was these new creative loan programs that caused all of our current home and credit problems.
Sure people shouldn’t get low introductory loans that will adjust upwards in two years especially when the current interest rates are at all time lows and they only get cost of living increases at work. But if they paid the correct price for the home they would most likely be able to sell it two years later and come out at least close to break even. But if they paid $50,000 too much to begin with, Gad Zooks…we have a problem!
Now the lenders made some very bad decision as well and some were based on greed, but most were based on helping the average person buy the American Dream! Lenders relaxed their standards of debt to income ratios, they opened up a lot of new products for zero down buyers, and to avoid PMI (private mortgage insurance) the came up with second mortgages that would cover the 20% down payment requirements to avoid PMI. Should lenders go back to requiring the same debt to income ratios they years ago? Yes and No, it depend on the people and their situation.
I bought my first home in Madison Park about 37 years ago( I was really young). To qualify I had to have a total debt to income ratio of 32% and my mortgage had to be 28% of my gross income or less and they required a 20% down payment. Here is deal though…that great bungalow I bought in Madison Park only cost $39,000 then so a 20% down payment was only $7,800. Today that very same home in Madison Park would cost $650,000 and 20% down would be $130,000. That’s tough for a young couple or single person buying their first home to come up with. Or maybe they shouldn’t even think of buying anything? We don’t think that’s right either.
Should the lenders require a maximum of 38% total debt to income like I had to have back in 1971? I think I was making about $30,000 a year then so that would be about $950 a month for bills, school loans, and a mortgage payment. My mortgage was $473 (I remember thinking I’d never be able to make the payments) a month and boy would I love to have payment amount again today! So it worked, I was able to get into a home, save a little money, and then 4 years later when I sold that home for $92,500 I was happy. Today if a person is making under say $60,000 a year, having a conservative debt to income ratio makes more sense, but if they are making $600,000 a year having a 38% ratio is silly, because they have so much disposable income it may make better financial sense to invest that additional income elsewhere, not in a down payment for a home. So maybe their debt ratio should be 50% or even 60%. Now, most all zero down loan programs are gone, kaput, extinct. But what about all those people that have good stable jobs, have been working in the same place for a longtime and want to use their money for something other than putting it down on a house. Maybe they own their own business and want to invest in their business to grow it, to expand it, to hire new people, you know the things that help the overall economy grow. If they have excellent credit and have not just changed jobs going from an ice-cream scooper (OK, I’ll get letters on this one) to a Nuclear Physicist they should have the option to buy something they can afford with no money down. Will bad things happen? Sure, sometimes they do, and they are out of our control sometimes, but the majority of people I don’t buy a home so they be foreclosed on.
Why do we always have to make such drastic swings when something bad happens? Sure the credit industry has been hit hard but it’s partly their fault. They sent out their appraisers to these homes that people paid way too much for, and somehow the appraisal came in on value. So now they are hurting and in some case hurting bad. It’s affected our economy seriously, but why swing so far to the opposite side? Making those extreme swings in credit policy will also have long term effects in slowing our housing market to the point that the whole economy is negatively effected, and so on and so on. Soon, hopefully, the lenders will see that they aren’t making as much money as they “should be” in the home mortgage market and they’ll start to relax the credit standards but how much more harm will they cause in the mean time?
And you home buyers out there…work with an Agent that’s knows what they are doing and won’t let you make bad buying decision because no loan program can compensate for that!
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