In the past month I’ve spent eight days coaching and teaching at three separate conferences of top producing Realtors from across North America. I’ve heard about market conditions from Toronto to Manhattan, Florida to Texas, California to Washington State and into western Canada. In every market I’ve heard sparks of hope as pending sales are slowly increasing, particularly in the lower price ranges as this summer’s housing bill begins to have effect.
On October 9th I participated in a conference call led by John Tuccillo, well known author and former NAR Economist (www.JohnTuccillo.com). Topics included the effects of the $700 billion bailout plan on the economy and real estate. I’m going to share Tuccillo’s comments, tempered by what I know about our local market and augmented by what I’ve heard from brokers around the country.
Tuccillo used the analogy that available credit for businesses to keep the economy functioning is similar to a transmission for the proper functioning of an engine. Tightening of credit for businesses has caused the economy to stall, resulting in layoffs and tighter spending. He suggested that within six months the bailout money will have flowed through the economy and almost every real estate market in the country will be moving again with significantly more sales and fewer foreclosures.
Some homeowners are struggling with mortgage payments. Many mortgages exceed current market value and most homeowners are not being helped by their lenders. Many won’t assist borrowers with loan modifications or make the short sale process so difficult that homeowners become overwhelmed by paperwork. This week there have been two significant events that should provide some relief for these homeowners. One is the Bank of America lawsuit settlement regarding Countrywide loans made between 2004 and 2007. According to RISMedia “Bank of America announced the creation of a proactive home retention program that will systematically modify troubled mortgages with up to $8.4 billion in interest rate and principal reductions for nearly 400,000 Countrywide Financial Corporation customers nationwide. Countrywide mortgage servicing personnel will be equipped to serve eligible borrowers with new program elements by December 1, 2008 and will then begin proactive outreach to eligible customers. Foreclosure sales will not be initiated or advanced for borrowers likely to qualify until Countrywide has made an affirmative decision on the borrower’s eligibility.” Homeowners with loans through Countrywide should begin contacting Countrywide on December 1st.
Whether we like the idea or not, the bailout of Wall Street was necessary to restart the economy. Investors who buy the assets (mortgage pools) may help homeowners keep their homes by modifying loan terms so that payments are affordable. Mortgages could be restructured so that the principle loan balance no longer exceeds the property’s market value. A possible payback solution could occur when the homeowner finally sells the property; the investor would recapture their cost by keeping 20% of the profit. If this works as is intended, Tuccillo predicts the real cost of the bailout to be about half of what is projected. He compared this bailout to the Savings and Loan Crisis where the actual cost was half of original estimates.
Another possibility for homeowners having difficulty is to refinance with an FHA loan through the HOPE program. Unfortunately, in most cases lenders are not yet prepared to use these options. Please don’t give up if you haven’t received viable options. Continue to contact your mortgage company and ask questions. Within the next few months more lenders will have the resources in place to determine whether loan modifications are possible. In addition, more lenders are willing to approve short sales, knowing it is far less costly than a foreclosure. Many of the people we assist with short sales become overwhelmed by paperwork and give up. A short sale is far less damaging to your credit than a foreclosure, which never gets removed from your credit report. Please understand there is a mountain of paperwork required for short sale approval. If you find yourself facing foreclosure, don’t wait to contact your lender and/or a Realtor, if selling is the only option to foreclosure.
How will we know the bailout is working? Tuccillo suggested that Wall Street’s ups and downs won’t be a true indication. He believes that by watching the spread between the LIBOR rate (London Interbank Offered Rate), which is the overnight rate that highly credit-worthy banks charge each other and the Federal Funds Rate, (set by the Federal Reserve Board) we will see the impact of the bailout. As I write, the LIBOR is at 4% with the Federal Funds rate at 1.5%. When the gap between these rates narrows, credit is flowing again to businesses and jobs are being created. Tuccillo reminded us of FDR’s speech during the recession where he told our country “The only thing we have to fear is fear itself.” Consumer confidence in the economy is critical.
Tuccillo stated that in most real estate markets the bleeding has stopped and markets are stabilizing. The Oct. 9th Phoenix Business Journal reported “national pending home sales for August were up sharply at 7.4%, which is the highest rating since June 2007. The Pending Home Sales Index in the West surged 18.4 percent in August and remains 37.7% above a year ago.” Intelligent buyers are recognizing that homes are more affordable than they’ve been in years, available inventory provide wide choice and buying at the bottom of the market provides the best opportunity for long term capital growth. Tuccillo compared buying now to Warren Buffet’s $5 billion dollar investment in Goldman Sachs. “Whenever everyone else is panicking and selling, it’s time to buy.” He pointed to tracking local market indicators, rather than the entire US real estate market. When the number of pending sales trend up and inventory levels drop, it indicates a market bottoming and changing direction.
In Casa Grande we are seeing those positive trends with an 8.9 month supply of inventory in September 2008 compared to a high of 20 months supply in December of 2007. Closed sales were up 21% in September 2008 compared to September of 2006.
Tuccillo predicts that the effects of the bailout will filter through local markets over the next six months and we’ll see improving activity across the board. He predicts that within a year we’ll see 30 year fixed rate mortgages 2% higher than they are now with inflation picking up again.
He suggests that by 2010 to 2011 most real estate markets will be healthy and strong again with activity similar to 2003, which was a healthy market before the crazy sellers’ markets that began in 2004. By the end of 2011 and into 2012 most of the baby boomers will have bought their second homes, which is a market segment he predicts will “come roaring back.”
The big question remaining is which presidential candidate will be guiding our economy through the still troubled waters. I am not brave enough to make any suggestions whom to vote for in this column. What I do know is that it’s more important than ever for each of us to cast our vote for the person whom we believe to have the most integrity and dedication to do what is in the long term best interest of our country.
Debbie Yost, CPC, CDPE, CLHMS, CRS, GRI is the Broker/Owner of RE/MAX Casa Grande and can be reached at Debbie@YostHomes.com.