Wall Street Greek: Money IS Available

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By Michael Douville - Real Estate Market:

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As a working broker, I interact daily with clients, and routinely scan for properties to purchase. I operate in "real time": using current closed sales; pending sales; and active list-prices for homes to assist in our buying decisions. This contrasts with "market models." Although these models act as great confirmation tools, the indicators may lag the present conditions by as much as 30 days. Statisticians, or the designers of these models, use accumulated data that is always slightly late in judging market activity.

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November was a terrible month, but December which has not yet been reported, was an excellent month in hard hit California and Arizona. Further, the numbers espoused as indicators for the whole market, and actually represent statistics of homes that have sold. In a given month, it is very possible to see greater influence from one segment versus another represented in the data. The recent market turmoil has resulted in a lopsided sales chart, because the most recent quarterly sales were largely found in the lower price segment (entry to mid-level). These sales reflect a favorable financing environment and the affordability factor of those segments, thus distorting the actual total market value.

There is plenty of mortgage money available for qualified homebuyers. The pundits in the popular mediums of TV, Internet, and print have scared the public into believing there is no financing available, or at least that it is extremely difficult to obtain. While it is true mortgage underwriters require documentation to prove qualification, those who are truthful with their credentials can easily obtain a loan, while those who are untruthful cannot; that is as it should be.

The mortgage market is returning to normal and the healing process is underway. Conventional loan programs are plentiful for buyers with even less than 20% down payment, and are available with mortgage rates under 5% fixed for 30 years. Even buyers with as little as 5% down can find conventional programs fully underwritten by mortgage insurance companies with very reasonable rates - in the mid 5% for a 30-year fixed rate loan. Homes are much, much more affordable now than just 12-18 months ago. Investors have historically paid a higher premium because of the perceived additional risk; however, just this week, loans for non-owner occupied buyers were quoted at 5.1% - 30 year fixed rate with 25% down. These lower rates will support higher prices and allow for much greater cash flow.

In addition to conventional programs, the FHA has aggressively marketed their programs with their standard down payment requirement of 3%. The entire down payment can even be gifted by a family member. Further, FHA is fully insured, and there is flexibility for loan underwriters to accept buyers with written letters of explanation in order to mitigate credit and income issues. This further expands the ability to purchase homes, and is creating an opportunity to obtain property at these price levels to many thousands of additional buyers. With few new homes coming to market, absorption of the excess inventory is underway.

The area of greatest improvement has been in the non-conforming "Jumbo" loans. These loans are above the conforming limits and are generally not sold in the secondary markets of Fannie Mae or Freddie Mac. These high-end loans are typically held in individual lenders' portfolios and remain on the balance sheets. With the bankruptcy of Lehman Brothers and the loss of several large financial institutions, the price of "jumbo" loans skyrocketed to prohibitive levels of 8-9%. The upper price ranges, though not immune to foreclosures, are not as affected by the downward price pressure caused by anxious asset managers. However, the consequence of much higher rates has been little or no buyer interest in the upper price ranges; the selling activity has been limited, thus resulting in market stress and downward pressure on prices. In the last three weeks, rates have tumbled to the low 6% range. Down payment requirements are still in the 20%+ range, but the typical luxury homebuyer uses far more capital than the average first time buyer (a 30-60% down payment is not unusual).

The statistics used by many of the published Housing Indices have been relatively absent of expensive homes, due to the restrictive nature of recent credit markets. With normalization of credit, more high-end homes will be sold, greatly affecting the medium and median home price. Obviously, if 100 homes are sold at an average price of 300,000, and now four homes in the $1.5 million range are added to the mix, the indices' average prices will rise dramatically.

Has the loss of this range put pricing pressure on the overall market? Has the lack of sales for this huge segment of the market exaggerated the housing price decline? If so, then the addition of high-end homes will soon show rising prices nationally.

One segment of the real estate market still under pressure is the Commercial Market. Loans underwritten by lenders have much higher down payment requirements and much more stringent credit criteria, thus better insulating the lender to market declines such as we are experiencing now. The duration of commercial loans, however, currently places them at risk. Most commercial loans are written with a term of less than 10 years; at the end of the term, the building would have been sold or a new loan would be obtained. Lenders are still risk averse, and would much rather place 100 residential loans for $10 million than one commercial loan for the same amount.

Owners with appealing buildings, in good markets, and with solid credit are still adversely affected; those with loans nearing the end of the loan term are having difficulties obtaining reasonable funds. Developers and builders with construction loans to rollover are finding the same challenges. Although hard on the commercial developers, this is limiting the new inventory coming to market, and thus helping with the absorption of the excess.

"I expect that those who have been fortunate enough to buy in 2009, will reap the rewards in 24-36 months."

In conclusion, residential mortgage money is plentiful and at historically low rates. Buyers with limited savings can find many loan programs to finance homes that can be bought at huge discounts to recent prices. However, sanity has returned to underwriting: not only does a buyer need a down payment, but they must QUALIFY for the loan and PROVE it. The healing process is underway. There are lots of quality foreclosures affecting the market and creating huge opportunities for current buyers; however, there is a finite supply. In my opinion, the year 2009 will show rising prices with fewer foreclosures as the year unfolds, and eventually rising mortgage rates as well. Normal market conditions could return by 2010 and a rental housing shortage may even develop by 2011. I expect that those who have been fortunate enough to buy in 2009, will reap the rewards in 24-36 months.