Reality is like a beignet without the powdered sugar

The current housing market is being described in extreme measures. The media seizes every word shared in a press conference and attempts to put the most dramatic spin on what was spoken. The lenders are scrambling to cover current losses and mitigate future losses. They advise us that the situation is returning to normal. Of course, they do not point out that over 100 lenders have ceased operating. Interest rates are historically very low and lending guidelines have been shored up to prevent future abuses.

(note: The fox is advising the hen’s that it is safe to return to the henhouse.)

The House and Senate are wringing their collective hands over the situation. They are having the members of their staff develop legislation language that will read well and offer dramatic sound bites in the upcoming elections. Any potential bills are being vetted to assure that the special interests groups will be protected by any new laws. Statements are being shared indicating that the housing crisis is serious and it will be dealt with quickly.

(note: The pied piper is playing his song and the lemmings are headed for the cliff.)

The National Association of Realtors is convinced that this is a wonderful time to buy. They have spent a great deal of money advertising the importance of using a Realtor in a real estate transaction. Their spokesperson has managed to skew every report regarding the housing market and blindly step before cameras proclaiming that the “market is fine”. When challenged by the stock market entertainer, Jim Cramer, that if you buy a home today, you will lose money – the President elect of the NAR retorted that the housing market in Indiana was just fine.

(note: Alice through the looking glass had a more accurate picture of the world around her.)

It is no wonder that the housing market has stalled. The media proclaims that housing prices are going down. The local Realtors offer statistics that sold prices are actually going up in some markets. You have a better chance at finding the pea in the thimble game on the streets of  New York than you do of making sense of the statistics used to convince you the market is up or the market is down.

The Federal Government offers that we are in danger of a recession but we also have to guard against inflation. The existence of one does not preclude the existence of the other. We do face both and housing is a large factor in both.

In a nutshell ……

Housing prices have risen to levels that are out of proportion to the salaries in any given area. This occurred, mainly, because the instruments used to finance homes were expanded to reduce the out of pocket money necessary to purchase a home. The easy availability of mortgage money allowed all borrowers the opportunity to buy. This easy access also supported the “eBay” mentality that led to multiple offers on homes and increased demand for a limited supply at that time.

As homes sold, others saw opportunity for large gains and they also placed their home on the market. The money sources were hit by losses on loans that went into default. These defaults did not begin occurring in large numbers until recently. The mortgage products used to “give away” the easy money were unique in that the payments would not go up for a few years. Those years have passed the payments are beginning to increase.

Qualifying for a loan has become a bit more difficult. The bigger change is that the programs that allowed borrowers to make purchases with no money out of pocket have been significantly modified. It is much harder today to get the creative financing of yesterday.

Therein lays the root of the problem.

It does not matter what the media says. It does not matter what bills are passed. It does not matter which dream world the NAR is operating. If first time buyers can not enter the system in sufficient numbers, the rest of the market will remain stagnant.

It appears that we have shot ourselves in the foot. There was a time when people saved money so they would have at least 5% cash to put down on a home. We wiped out that entire population with the no money down needed loans. They spent the money. Those that followed, stopped saving….you did not have to save anymore! Programs were created and homes were sold and prices kept going up.

The 100%+ financing changed the landscape. There is no money in savings accounts. If we are to understand the impact, we must understand that the market can not recover until those that want to buy a home have the opportunity to save the 3-5% cash needed. That will take time. That may take longer than the pundits are sharing. That most likely will not occur in the spring of 2008. It may not occur until the spring of 2009 or later.

The government is right. Inflation is a problem. A recession does appear to be in its early stages. Neither of those events makes it easy to save money.

Prices are coming down. Prices will continue to come down until they reach a level which is more closely related to the income of the area in which homes are located. It would not surprise me if homes that went from $200,000 to $400,000 over the last few years to find their value return to much closer to the $200,000 level. We will not see a 20% decline; we may see a 50% decline before the market becomes relatively active again.

Those that purchased in the last 3-5 years will find that they will have to stay in the home 10-15 years before they realize equity gains that were thought to be commonplace just a few years ago. The days of purchasing and moving up and making money in a few years are gone!

The only people that should be selling their home are people that need to sell their home. Just as investors have sought the greener pastures of the stock market roller coaster, those that purchased real estate hoping to cash in on the frenzy need to re-evaluate their business plan. The glut of homes on the market only indicates that all prices are too high and breaking even on recent investments may be impossible.

We all see the “for sale” signs in our neighborhoods. Many streets have three, four or more within a few blocks. The signs may have gone up last spring. The houses may be vacant. They remain for sale and no one is looking. The signs and homes are sitting there gathering dust.

No one is making offers on homes for sale. Nothing can happen until an offer is made. It doesn’t matter the price point, there can be no negotiation until someone says something. If the price is too high, a buyer can make an offer. That used to happen. It is not happening now. It is not happening on inexpensive condos, it is not happening on mid-priced town homes, it is not happening on single family homes. It is not happening.

It does not seem to matter what the price is for homes now. There is no activity among first time buyers and without that upward pressure, no one else is in a position to move.

The dust you see being blown off the for sale signs is really just the sugar on a powdered beignet. All that is left is a rather bland dough ball and that is just not happening.

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