According to the national press, no one can get a mortgage. Plus, everyone who has one is falling behind and is soon to be in default. After all, look at the numbers on the mortgage write offs - tens of billions. People are talking about a total problem in the $300 billion range. Sounds insane, doesn't it? We need to begin digging trenches, loading up our pantries for when the Depression comes and we are all out of food, water, and "gasp" money to buy real estate.
Scare sells. Sensationalism sells. Is this a tough market? You bet.
Take this challenge. Are any of the following statements false?
1. House prices are trending down in many markets.
2. Banks are writing off billions of dollars of value in their mortgage security investments.
3. The foreclosure rate is the highest it has been since that last debacle with the savings and loan associations in the late 1980's.
4. Inventory is continuing to climb in most areas
If you said none of of these, you have been watching too much news, and reading too many newspapers. As you will see below, number 3 is FALSE; sub-prime delinquencies were worse in 2002 and all mortgage delinquencies were about as bad, according to Guy Cecala, founder and chief prognosticator for Inside Mortgage Finance, a highly respected and influential newsletter in the mortgage industry.
Is the entire residential real estate market going under? Nope. Guy Cecala provided some perspective at the October Research (think newsletters for Title, Escrow, etc.) meeting in Orlando in early December.
Cecala forecasts mortgage originations for 2008 to be around $1.75 TRILLION (admittedly to him a worst case scenario). (I use the word around because I am working with charts versus a data file.) That is down from 2003 when the mortgage companies were still in refi heaven, of about $4 TRILLION. Keep in mind, this is YEARLY originations. Ok, so how bad are mortgage delinquencies? Well, for 2008, Cecala is forecasting about 2.48% of mortgages going into default. Note this is not foreclosure...work outs are happening. We were actually close to that in 2002 when about 2.4% of mortgages were seriously delinquent. That means that about 1.7 million mortgages will be in default - not happy daze, but not 1935.
Is sub prime default seriously worse? Yes. But to put this in perspective, Cecala is forecasting somewhere around 9.3% of sub-prime mortgages will be in default. This is DOWN from 2002, when about 11.9% of them were in default.
Yes, there were many more sub-prime mortgages offered in 2005 and particularly 2006 when many banks were trying to shore up their originations and giving mortgages to people who could maybe walk a few steps and lie effectively about the money they never made to get 100% loans. In 2006, 33% of loans were sub-prime or Alt A, according to Inside Mortgage Finance - or roughly $ 1trillion in mortgage loans. So, if you do the math - that's about $158 billion in loans that could go bad that were written in 2006. And, yes, we have a couple of years of these bad loans coming up for renewal or beginning to fail. Even if we are at a total $500 billion, which no one is suggesting, for 2-3 years worth of mortgage lending, that represents about 8-9% of mortgages written from 2003-2006.
Will this put more inventory on the market? It will. Will it suppress prices? In some places. But what is really killing the market is bad information and sensational reporting focusing on the poor souls who either didn't really understand that they were not getting a free lunch, or the ones who entered into this fraudulently. Meanwhile, the rest of us are paying our mortgage, getting on with life, making a little more money - because after all, unemployment is still below 5% across the country. The economy is still growing. But scare tactics interfere with the normal game between the seller and the buyer. 
The buyers want the lowest price, so they are waiting for the "specious" lowest price. The seller wants to maximize their price, so they are playing the waiting game as well - taking much longer to sell without lowering their price in order to get past this "horrendous market".
Time to educate our buyers and sellers about what the real numbers are and where they are. Again, I suggest shutting off the TV at news time and encouraging your clients to do the same thing. I also suggest avoiding reading any "reporting" in the newspapers that reinforces the "sky is falling" routine (see my first post).
Send me your market information and let me know how bad it really is or isn't. I know sales are down, but I don't see huge depression in home prices in most areas - just where prices were over inflated (San Diego), where the condo folks went berserk (Miami, Tampa and elsewhere) or where jobs are being hoovered out of the marketplace by plant closings (Detroit) or other manufacturing going to lower cost markets (Ohio).
Tell the real story...and people just might get out and BUY!
For more information, see Inside Mortgage Finance at www.imfpubs.com. Also, www.mbaa.org for the Mortgage Bankers Association. They have different information, but they quote Guy Cecala of Inside Mortgage Finance extensively. October Research is www.octoberresearch.com. This blog can be seen on Technorati Profile">Technorati as well.
RE Info Geek.
I would love to send you a copy of the letter that I sent to the editor of our local newspaper. Tell me how I can scan it to you.
Posted by: Debra Weninger | January 14, 2008 at 08:40 AM
Love your blog!!! As a real estate agent, I am constantly asked questions that you have just answered. I will be sending clients to your blog.
Posted by: Gillan Abercrombie Frame | January 18, 2008 at 01:52 PM