Wednesday, April 04, 2007

Why home-ownership shortcuts will lead to longer recovery

The following article includes what I believe are some very valid concepts that help to explain why the current sub-prime mortgage mess will lead to a significant increase in foreclosure activity, and why this will also cause a much slower recovery in the housing market, than what many "experts", including the National Association of Realtors, would like consumers to believe.

For those of us in Central Ohio, the ultimate impact will be far more dire than many would like to admit. With low to non-existent new job creation in the state, coupled with the continued loss of existing manufacturing jobs related to the automotive industry, capped with excessive sub-prime loan origination over the past several years, I would posit that Ohio can expect of wave of foreclosures of "tsunami like proportions" over the next two to three years. This will undermine property valuations in every community in the state. It will not be a question of how much can I expect my property to appreciate over the next several years? But the exact contra of that, in that the question will be how much will the property values depreciate and for how long?

This will in the near term trigger a cyclical series of movements by home owners who will not have considered selling otherwise, but well might consider selling "now" in order to cap the downside risk of diminishing property values over the next three to five years. This "added" inventory will further soften the market. The only realistic way out of this impending disaster is for the government to reduce the tax burden on businesses and consumers and to create incentives for existing businesses to move into the state, or for entrepreneurs to start companies. Unfortunately, the new governor has already started trying to raise taxes which will only further fuel the number of jobs that are fleeing the state.

As an added downward risk, unless government, at all levels, takes significant "cost" our of the bureaucratic infrastructure, many government entitities will find themselves loosing significant revenues from property taxes as the assessed value bases will decline, and those in foreclosure, when not paying mortgages, will most certainly not be paying taxes as well. Of course, the government, at all levels will have an initial knee-jerk reaction to fill the gap by increasing taxes on the rest of us. This will only further increase the exodus of jobs and constitutents to more tax friendly environments.

While this appears to be an "overly dark" assessment of the near-term real estate and economic climate in the State of Ohio, I firmly believe that what we can expect to see down the road will look more like this scenario, rather than less.

Vito Boscaino
Owner/ Realtor / MBA
Help-U-Sell North High Realty

"Guest perspective: An insider's view on the subprime mess
Wednesday, April 04, 2007By Steven Krystofiak

Editor's note: Steven Krystofiak offers an insider's take on what's been unfolding in the subprime mortgage industry. But he is no industry apologist. Stay tuned for a series of articles from Krystofiak on Inman News in coming weeks.

Every year there is a natural progression of future first-time home buyers, usually consisting of people in their late 20s to mid-30s. These people have obtained financial stability with savings and steady employment, which is a healthy precursor to buying a first home.

In recent years far too many people took popular shortcuts to obtain their homes. These shortcuts are in stark contrast to healthy real estate practices that have a long, traditional, proven track record.

In many cases, these new highly popular loan products were the only way for first-time home buyers to obtain a home. These shortcuts were misnamed "affordability products" and would have been better described as "obtain-ability products." Long-term affordability, which should be a goal for both consumer and lender, is not associated with these toxic shortcuts.

The home-obtainer-ship shortcuts included "stated-income loans" (which encouraged consumers to lie about their income on mortgage applications), zero down payments, negatively amortized loans, interest-only loans, and short-term suicide loans where the fixed loan period is only two or three years commonly tacked on with an equally long prepayment penalty. Many times the menu of these options would be coupled together.

People who took shortcuts should have waited, and were only able to obtain a home because of the risky loans that will be the culprit of their foreclosures in the coming months and years to follow. Many people facing foreclosure should have waited one, two or even three years before starting the home-buying process.

Communities, the media and industry insiders built up the courage to the would-be home buyers with such rhetoric as, "If you don't buy now you will be priced out forever," and "Real estate prices only go up," and "You can't afford not to buy a home," and "If you buy one property you can make $50K a year, so why not buy two, three or four more properties and
make even more?"

Lastly, I end with my favorite quote that came from a winner in a real estate game show: "This (market) is not a bubble; bubbles are for bathtubs."

The hype and hysteria we have seen for the past few years gave comfort to people wanting to take out these loans. But with foreclosures sure to happen in droves just around the corner, these people otherwise would have been the ones helping us get out of the future impending home debacle we will continue to experience in 2008, 2009 and 2010.

With these recently foreclosed people now out of the real estate market in 2009, where will that natural progression of home buyers come from? With foreclosure or bankruptcy on their records there will be a lack of qualified candidates to become first-time home buyers in the future. This will cause the future recovery to take longer than in previous real estate corrective cycles.

First-time home buyers are the key to a good real estate market. An old rule of thumb is that with every first-time home buyer entering the market there is a filtering up, which creates three more transactions. A large reason the real estate cycle of the last five years has been so successful is because banks have been able to provide toxic mortgages to first-time home buyers. This has kept the succession of real estate sales going and going like the Energizer bunny.

But as many of you are now thinking, "I haven't seen that bunny on TV for years." There lies the problem -- this market can't keep going.

The market needs more first-time home buyers for it to be successful. Without them, in coming years the real estate market will go the way of the Energizer bunny. In the future, you will think back just like with that commercial and say to yourself, "Oh yeah, I haven't seen home-price appreciation in years."

Steven Krystofiak is a mortgage broker based in California. He is president of the Mortgage Broker Association for Responsible Lending, an advocacy group.

(Read Krystofiak's previous articles, "What is a subprime loan? It depends on whom you ask," and "High-risk loans enable buyers to obtain, not afford homes.")"

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