A few days ago, the National Association of Realtors reported some pretty startling numbers — existing homes sales had dropped 27% or, put another way, the largest drop since the NAR started keeping records in 1999.  Holy Housing Recession, Batman!  What are we to make of this?

Here are some of the possible causes…and a possible upside.

Tax Credit Go Bye-Bye

As of April 30th, the tax credit was gone.  No more free money from everyone’s Uncle Sam.  Heck, who would want to turn down $8,000.  Even the Tea Partiers liked it.  However, it was really an artificial stimulus to try and jump start the housing market which, in turn would help jump start the economy, in general.  It worked while it was in place.  Now that it is gone, though, nobody is in a mad rush to buy a house.

Mortgage Standards are Much, Much Stricter

Remember the days when, if you could fog a mirror, you could get a mortgage?

You could “speculate” about your income and your assets and someone would lend you money to buy a house.  Sometimes the mortgage interest rate was high, sometimes you were only paying the interest, sometimes you agreed to an interest rate that was real low to begin with but would jump in about a year or two or three.  Those days are gone. Really.  They aren’t coming back, either.

Nowadays, to get a mortgage you need to be super platinum with lots of documentation to prove it.

• Great FICO score
• Good income
• Low debt
• Money in the bank

There are a few specialized mortgages in the world but, for the “Regular Joe or Jane” who just wants to buy a house, the choice is probably FHA or FHA (maybe VA, if they’re military).  That means a minimum of 3.5% down payment plus any of the closing costs that the Seller won’t or can’t pay on behalf of the buyer.

Not pretty

Mortgage Interest Rates

Normally low mortgage interest rates would be a good thing for stimulating home buying activity.  Not so much if they keep going down, down, down.  Home buyers will sit on the sidelines waiting for them to go back up before they realize that the “bottom” has been reached and they missed the interest rate gold rush.

That means that there are probably lots of people who are watching the mortgage interest rates and trying to “time the market”.  This never works well but that doesn’t mean people don’t do it again and again and again.  Of course, the lower the mortgage interest rate, the lower the monthly mortgage payment will be.  So it makes sense to try and get the lowest rate possible.  More to the point, people who are on the sidelines are not really eager to buy a house.  They will, if the planets are in alignment, but not until.

Home Owners That Are Not In Distress

In my opinion, a big reason home sales are down is because home owners have finally come to grips with the fact that they will not get anywhere near the price they would like.  Home owners that are paying their mortgage every month like they signed up to do, home owners that are not in any kind of mortgage distress or income distress and consider their home to be a place to live vs an ATM machine have no reason to sell.

Let’s look at it like this:  a home is a nice place to live because it keeps you dry when it rains, warm in the winter, cool in the summer and has indoor plumbing.  You may or may not like your neighbors or even know your neighbors but they probably leave you pretty much alone and that’s just fine.  You know what school your kids are going to and waht grocery store you can buy your food from and you get that nice mortgage interest tax deduction, too.

So, if you don’t have to sell, why should you?  There’s no good reason.  Result: less home sales.

Fewer Homes For Sale Equals Stabilizing Prices

Finally, fewer home sales could be a good thing for home prices.  Fewer homes on the market (i.e., housing inventory) means that there are fewer choices for the real home buyers (as opposed to tire kickers) in the marketplace. That means that home sellers can stand a little firmer on their asking price.  All this is good.  We need a stable housing market.  No question about it.  The sooner we reach an equilibrium where neither the home buyer nor the home seller have an out sized advantage the closer we will be to a real housing recovery.

It seems like the planets should be in alignment. Home prices are low. Mortgage interest rates are low (incredibly low). Home sellers have gotten the message that they need to keep their place in good repair and possibly offer closing help to the buyer.  There are plenty of homes on the market.

What’s not to like?  Why aren’t home buyers out there snatching up the bargains?

Mortgages

The short answer is that they can’t get a mortgage.

Unlike the early 2000s when anyone who could fog a mirror could get a loan with zero down and no closing costs, today’s mortgage environment is very, very tough.  It seems you need to be made of platinum and, even then, it’s no sure thing.

• High FICO score
• Low Debt
• Good Income
• Money in the bank

…and documentation out the yin yang to prove it all.  Still, that doesn’t seal the deal.

If the underwriter feels a little queasy about a Visa bill you were late on five years ago or if the appraisal comes in fine but the underwriter doesn’t like it because the appraiser had a couple of typos.  Maybe the appraisal came in well under the contract sales price because of all the foreclosed homes and short sales in your neighborhood.

The bottom line is that there are a hundred and one things that can go wrong in the mortgage process and something probably will and it’ll kill the deal or make it a damn bitter pill to swallow.

The sad part is that there is nothing a home seller can do.  Price the home competitively, keep it in pristine condition…and hope the mortgage underwriter isn’t having a bad hair day.

In a down market the reason a house doesn’t sell is not always obvious.  If the price is competitive and the condition of the house is good there really isn’t a good reason it shouldn’t sell.  Of course, the real challenge is getting the potential home buyers into your home in order to get that “I-could-live-here” feeling.  Sometimes price alone doesn’t help.

Even with the Internet, virtual tours, and all kinds of other information at a potential home buyer’s fingertips they still, for some reason, never put your home on the “I-want-to-see-this-home” list.  Many times they may be guessing at what their monthly payment would be or they may not know much about a certain neighborhood.  That’s where a professional Realtor comes into the picture.  A good buyer’s agent would provide the kind of information about neighborhoods and payments and all kinds of other stuff that may not be readily available on the Internet.

Would it be a good thing to try and entice the Realtor into putting your home on the “Let’s-just-take-a-quick-look-at-this-home” list in the hopes that his client — the home buyer — might just think it’s the place they want to buy?

Let’s be blunt.  Any Realtor who takes his job seriously and is looking out for the best interests of his buyer client will show the home buyer any and all homes that match the home buyer’s stated criteria. Added financial incentive shouldn’t play a part.

But it does.

In these hard economic times, Realtors that are still in the business are working twice as hard to put food on the table and keep up with their own mortgage payment and other expenses.  If there is a chance to make a few extra bucks, a lot of Realtors will go for it.

The Key Is To Keep The Home Buyer’s Interests In Front

I’ve never been a big fan of the buyer’s agent bonus.  I would prefer that the home seller reduce the price of the home.  It makes the home more competitive and it directly benefits both the home buyer and home seller.  However, when the price has already dropped to the bargain basement and the house is really in decent shape and it’s being marketing globally on the Internet and everywhere else, an agent bonus might do the trick.

The important thing is to let the buyer know that there is a bonus being offered on a particular property so that the buyer will be able to make an informed decision.  It’s still alright, in my view, for the buyer’s agent to point out all the positives of the house.  Quite frankly, Realtor compensation should be irrelevant to a buyer’s decision if they really, really, like the house.  However, I can understand that some people would feel that an agent might be “pushing” House A over House B as the result of the agent bonus.

Do You Trust Your Agent?

An important aspect of any relationship is trust and, hopefully, there is a little bit of trust in the Realtor/Buyer relationship as well. The Realtor should trust the buyer to make a good choice that’s good for them and the buyer should trust the Realtor to provide professional advice during the home buying process.  If that trust is there, the bonus shouldn’t be a big deal.

It might be a big deal to the home seller, though, because it might just be the thing that brings that one buyer (and you only need one) into the house who will love it and want to purchase it.

Do you think a buyer’s agent bonus is a good idea?

Everywhere I turn nowadays, I hear that real estate is on the rise.  Well, OK, not everywhere.  Not on the news. Not in the real estate blogosphere (known as the RE.net). Not from statistical analysis. Not from the National Association of Realtors.

Everywhere else, though.  People on the street.  My barber mentioned that real estate was getting better…wasn’t it?  Potential seller clients (always optimistic) tell me that real estate is getting better…isn’t it?  People at my church tell me real estate is getting better…right?

Sure.  If you say so.

Saying So Doesn’t Make It So

At some level, if you get enough people to talk up a particular topic whether it’s the real estate market, the stock market or the latest mystery thriller on Amazon, that thing will go up.  This is what stock market speculators do.  They buy a stock, send out rumors and whispers on the Internet and through all the other channels that people think have authority and, voila, the stock price goes up, the speculators dump it and everyone else is left with a dud stock.

If enough people start to talk up the real estate market, it might actually go up.  But not for long.  With a  huge amount of inventory (i.e., homes on the market available for sale) there is no way that prices can rise.  it’s simple supply and demand.  There is a ton of supply.  Virtually no demand because of the horrendous mortgage environment.  So, unless your home happens to be in one of the pockets that are doing well because of the geographic location, you probably won’t actually see any movement.

What Needs To Happen

Now that the Government has stopped stimulating the housing market (i.e, the tax credit is gone).  We need to get the banks to loosen up credit for mortgages.  I don’t suggest that they start lending to anyone who can fog a mirror like they did in the old days. I am suggesting that there are quite a few financially qualified buyers that are looking for homes to live in and quite a few financially qualified real estate investors looking for the bargains they can snap up, rehab, and re-sell.  It’s time to provide the capital to allow these “players” to get into the market and reduce the housing inventory.

Once the number of houses available for sale has been reduced significantly, prices will stabilize and even begin to rise, again.  Not at 25% per year like the good old days.  That bus has left the terminal.  Maybe somewhere in the neighborhood of 3% to 5% per year.  Still, that will be enough to turn a home into a retirement nest egg as well as a nice place to live with heat in the winter and cool in the summer.

The “housing recovery” is proceeding in fits and starts.  There was a uptick in the April time frame due, mostly, to the expiration of the home buyer tax credit.  Both new homes and existing homes saw an increase in sales and some stabilization in home prices.  Both good things.

Whether this continues into May and June is another story.

Does Seller Contributions To the Buyer’s Closing Cost Help?

Currently, the FHA allows the Seller to contribute up to 6% of the sales price of the house being purchased.  For a $300,000 house that’s $18,000 — a lot of money — and probably what it takes to assure the buyer gets to the settlement table.  However, the FHA is moving to reduce the amount of Seller contribution from 6% to 3%.  So, using the same $300,000 house, that means the Seller will only be able to contribute $9,000 towards the Buyer’s closing costs.

That still sounds like a lot of money.  Yet, in Maryland (one of the most expensive, if not the most expensive, State for closing costs) for most FHA home buyers, it may not be enough.  Most home buyers in the moderate to low price ranges just haven’t saved up that much actual cash.  They still need to come up with the 3.5% down payment (that’s $10,500 for a $300,000 home) . So, they look to the Seller to assist with the closing costs.  If that happens the Sellers sells, the Buyer buys and everyone’s happy…or, at least, satisfied.

Less Closing Help Could Mean Fewer Buyers

Creating a requirement for the home buyer to come up with even more cash to purchase a house may decrease the number of buyers in the marketplace.

• Fewer buyers mean fewer home sales.
• Fewer buyers equals lower home prices as home sellers try to compete for the fewer buyers in the marketplace.
• Lower prices might equal more short sales or foreclosures due to home sellers losing the equity they need to sell their home and pay off their existing mortgage.

Still, there is the school of thought that home buyers should have the money to make a home purchase. Part of the problem we’re experiencing now was bought on by allowing lots of people with little or no financial resources to buy a home they couldn’t afford.  Forget the down payment and closing costs.  They can’t even afford the monthly payment.  So, the thinking goes, we should force home buyers to come up with as much cash as they possibly can to make the home purchase.

It’s a real conundrum.  We really need to shake through the existing inventory of homes sitting on the market.  Yet, we need the people who buy those homes to have the financial ability to make the initial purchase and keep up the mortgage payments for years to come.

Do you have an opinion about this one?

I’m often amazed at how the home buyer of the 21st Century approaches the task for home buying.  Especially the first time home buyer.

Regardless of how many “home buyer seminars” available from any number of outlets — Realtors®, lenders, government agencies and non-profits — there are still gobs of first time home buyers that don’t have the first clue about how to conduct a search for what may be the biggest and more important decision of their lives.

I Can Text But I Can’t Seem To Use The Internet

I recently came across a home buyer who was obviously just out driving around and looking at yard signs. Nothing unusual about that.  What was unusual is that this home buyer started texting back and forth with me with the questions she had about the house — price, number of bedrooms and baths, how many levels, etc.  All this information is readily available on the Internet through Realtor.com and other real estate centric websites.  However, this particular home buyer thought the right way to find out information about the house was to contact the agent whose name was on the sign.  Instead of calling (you need a phone number to text) she would send a text message.

A high tech tool with a decidedly low tech approach.

Why Yard Signs Anyway?

Yard signs, for the unitiated, are physical signs posted in the front yards of homes available for sale.  Now, you would think that the yard sign, as a way to market a specific listing, would be as old school as you can get.  But, believe it or not, it is still a great source of home buyer leads.  The neighbors get curious, of course, and people still actually drive around, using gas and getting lost scouting out neighborhoods.

Here’s the thing. I, personally, use yard signs to serve as a marker for Realtors® looking for the house with their home buyer client in their car.  I also use it to let the neighbors know they can call me about the house and about selling their house.  You know, the “neighborhood expert” thing.

I really don’t expect, in this day of Virtual Tours and tons of interior photos, home valuation scores, Walk Scores and so on that people will actually be using gas and time to look for homes that have yard signs in front of them.  Especially since the typical yard sign is really not a true indication the house is still for sale.  Many times, it’s under contract, pending settlement.

Yet, it seems to happen all the time.  It’s like folklore handed down through the generations.  No matter how technology evolves to assist home buyers with search and decision making, they still want to ride around (without a Realtor®), attend Open Houses (without a Realtor®) and even though they could use the same phone they’re texting with to talk to someone…they text.  Go figure.

I recently received this tidbit from a lender:

As of June 1, most investors are instituting Fannie Mae’s Loan Quality Initiative, which will require a credit report to be pulled just prior to closing.  This will mean that any new credit or inquiries made since the initial report must be taken into consideration by the underwriter.

I urge you to counsel any of your buyers to refrain from any credit applications during the home buying process or, if necessary, to consult with the loan officer before doing so. (emphasis mine)

In this case, the word investors means the bank or credit union or mortgage company that is providing the money for the mortgage.

Many people go on a little bit of a spending spree before real estate settlements to buy things like furniture or kitchen things or all kinds of stuff for the new house.  The advice from this tip is: DON’T DO IT!

There can be nothing worse than getting ready to attend your real estate settlement, take the keys to your new home and have the movers (or your friends) ready to go and find out that it isn’t going to happen because you may have over extended yourself a bit.

Be careful.  Consult with your loan officer.

It can be argued that the mortgage profession has been broken for a long time.  Ever since the first adjustable rate mortgage or No Money Down mortgages became available the system started to deteriorate.  People no longer had to work and save.  Buying a house went from being a very big deal where people stayed in their homes and neighborhoods for decades to being an “investment” that required a high re-sale potential.

Of course, the financial services industry exists solely to create more wealth for itself so they came up with mortgage schemes that became more and more exotic.  Pretty soon all you needed to do was fog a mirror and be able to sign your name in order to get a loan for many hundreds of thousands of dollars.  The sub-prime housing bubble was the result.  The housing market bought the rest of the economy down with it as the Big Boys on Wall Street defaulted on promises to make good on bad investments.  Think AIG.  Think Lehman Brothers.

Fast Forward to Today

Now, the pendulum has swung so far in the direction of caution and risk avoidance that responsible people with a job, money in the bank and a history of good credit have a hard time getting a mortgage — even if they have a current, up-to-date mortgage now!

I recently encountered two situations that give me pause as to whether or not we will ever get back to any kind of “normal” housing market.  Both are true stories:

But I’m Really A Responsible Person

A couple has owned their home for several years have decided to “move up” to a larger home in a different neighborhood.  They have no debt outside a small balance on their mortgage.  They have a joint, household income that is substantial and a great FICO credit score.

Here’s the challenge: they have dealt with only one financial institution – their Credit Union – and their Credit Union only reports to one credit reporting agency.  You wouldn’t think this was so bad except that mortgage underwriting standards want the “tri-merge” score from three credit reporting agencies.  So even though the rest of their financial life is on order, they will have to jump through some hoops to finalize their mortgage.

Not The Right Kind Of House?

A large co-operative housing community is suddenly thrust into a position of not being able to point potential members/home buyers to lenders.  The reason:  many lenders do not provide financing for co-ops because the borrower doesn’t really “own” the home.  They own a share in the corporation.

Never mind that this particular community has been around for close to 70 years.  Never mind that there are so few foreclosures that it’s negligible. Never mind that down payment requirements and credit score requirements are already extremely high.

Now Fannie Mae and Freddie Mac want to evaluate the co-op community and decide whether or not they will back the mortgages.  If they decide not to do so, there will be a whole lot of people crying the blues and the two financial institutions that will continue to lend will have zero competition for mortgage interest rates or fees.

Just The Tip Of The Iceberg

This is really just the tip of the iceberg. There are tons of stories of responsible people with the cash reserves, good credit and verifiable employment that have a hard time getting a mortgage.  I’ve written about the problems with condos.  Home Owner Associations of townhouses and even single family homes are going to come under the same scrutiny.

With all this talk of financial reform and whatnot, it’s time for someone to take a good hard look at the mortgage industry in this country and make some corrections.  It’s time to use some leverage to get the financial institutions to make loans to responsible people who want to buy homes.

Many times we get an idea that we want something — like our first home or our next home — but we don’t really have any idea how to start.  Even people who have livined in their own home for years may have forgotten how complicated the process can really be.

Here are five “must have” items to get started on buying your first home…or your next home:

1. A Realtor

Believe it or not, even with access to all kinds of information on the Internet about what homes are available and all kinds of other stuff, it is still best to get a professional on your side to help you through the process.  In the MD Suburbs of DC, we call these types of Realtors buyer’s agents.  Buyer’s agents have a fiduciary [legal] responsibility to represent your best interests.  Sure.  You could run around to Open Houses and check the Internet for the For Sale By Owner places but remember when you talk to a Realtor in an Open House you are talking to the seller’s representative.  His or her fiduciary duty is to represent the best interests of the home seller.

Besides, a Realtor (buyer’s agent) can get you into homes on your schedule.  It’s kind of like your own private Open House.  The house showing part of the process is really just the tip of the iceberg.  There is the negotiation for terms that you would like to offer, the home inspection, appraisal, and on and on.  The bottom line is that if you really want a “good deal” on a house you like in a neighborhood you’ll enjoy living in then you should hook up with a Realtor.

2. A Mortgage

Unless you have a suitcase full of cash or lots of money invested somewhere you can get at it, you’ll need a mortgage.  Finding a good, experience loan officer from a reputable lending institution will be key.  This is another area your Realtor can help out.  A good buyer’s agent will have had experience with lots of different loan officers and know the good ones who can get your mortgage funded by the time of the settlement date.

It may be surprising to most people that this is not a slam dunk.  Mortgages are extremely difficult to obtain nowadays thanks to the sub-prime loan debacle.  If you don’t have someone experienced at getting things done you may find yourself with a lot of disappointment and you may even be out some cash.

3. Money

Surprising as it may sound, there are still a lot of people in the world who think they can buy a house without any money.  This is a myth.  The VA Loan is about the only mortgage that still has no down payment.  You still have closing costs and it’s not a given that the home seller will pony up all the buyer side closing costs.

FHA requires a minimum of 3.5% of the sales price of the house as a down payment.  On a $300,000 house that’s  $10,500.  And you still may have to pay some closing costs depending on the specific house and situation.

There’s also home owner’s insurance you have to purchase, the cost of the home inspection, the appraisal and so on.  You’ll need a stash of cash.

4. Focus

It really helps a lot if you have some idea of where you want to live and what type of home you want to live in.  “Somewhere near METRO.” is not focus.  “Silver Spring” is not focus.  Think about the neighborhood you like or at least the little part of the town you want to live in.  Do you really, really, really need to be 1o minutes from METRO?  If so, are you (or can you) pay the price?  What type of house would you like to live in?  How many bathroom do you need? Is a fireplace important?

The whole point of focus is that it can really help you and your Realtor find a home you’ll be happy with.  It may take a little while to find just the right one but if you know what you’re looking for, you’ll know it when you see it and be able to make a good decision.

5. Time

This is not time as in “I have all the time in  the world.” or “I don’t really want to move in until sometime next year.”

Time, in this case, means that you are willing and able to set aside a significant chunk of time to:

1. look for the home you want
2. put together the documentation you’ll need for the mortgage
3. attend the home inspection
4. attend settlement

If you have other things going on in your life that are more important, that’s OK.  Just set the house hunting aside until you can devote your time and energy into finding the place you’ll probably be living in for the next 10 years or more.

This is the place where you may be raising a family, getting involved in the neighborhood association and schools and all kinds of stuff.  So you need to set aside some weekend time and maybe even take time off work so you can get out to look at places without running into crowds.

Time devoted to this process will be the best use of your time ever!

Except for the five to six years of the housing boom (some may call it “bubble”) condos have always been slow to move in this area. One reason is that there is a huge inventory of townhouses and single family homes. Another reason in the condo fee/property tax/condo fee delinquency one-two-three punch.

Homes For Sale

The fact of the matter is that, for right now, there are a ton of homes on the market.  Granted, a lot of them are short sales or bank owned foreclosures. Still. If a potential home buyer has the inclination to do any sort of repair work at all, they can grab a nice house at a good price in a decent neighborhood.  Even the homes that are not in any kind of mortgage distress and are in decent shape are going for prices that are much more affordable.  The only thing holding home buyers back is their ability to get a mortgage — no small challenge.

The Condo One-Two-Three Punch

Condo Punch 1 – Taxes

All real estate has property tax.  This is the money that helps the particular County where the real estate is located to provide a lot of the services that people have come to expect. Things like education and public safety. Unfortunately, as time passes the price of things people get for “free” — like schools police and fire fighters — keeps increasing.  I don’t think anyone would say teachers and police don’t deserve to be fairly compensated.  Yet, the way these folks are paid is through the revenue generated through the sale of real estate and home ownership.

Thus, property taxes in the MD Suburbs of DC are pretty darn high. So are the transfer and recordation fees that are charged when real estate is transferred from the home seller to the home buyer.  For some reason, unknown to me, property taxes on condos are just as high as property taxes on single family homes and townhouses.  Go figure.

Condo Punch 2 – Condo Fees

Condo fees have also risen to astronomical heights.  To be fair, the condo fee includes a lot of maintenance, professional management, reserve funds, insurance costs and much more. Sometimes the cost of utilities like electricity and water are included in the condo fee.  All that cost big bucks.

Yet, if there is a large condo fee plus high property taxes it means that the actual listing price of a condo needs to compensate for both.  Mortgage companies factor in the condo fee and the property taxes when qualifying potential home buyers.  Outside of the condo world there may be relatively low Home Owner Association fees.  The condos, however, have a much higher fee which could knock a potential home buyer out of the running.

Unfortunately, many home sellers with condos can only price their home so low.  If there is any equity at all (a big if) it’ll get eaten up by offering a price that’s too low considering the common practice nowadays is to also offer the home buyer a credit to offset the home buyer’s closing costs.

Condo Punch 3 – Condo Fee Delinquency

Lastly, there is a disturbing trend of rising condo fee delinquency. This affects even the most responsible condo owner. If a lot of the neighbors and fellow condo owners are letting their condo fees slide or they made a conscious decision not to pay them, it affects the ability for anyone to sell their condo at any price.

Mortgage companies will not lend into a condo community where the condo fee delinquency is too high.  This is particularly true of investors who may want to buy a condo to rent out or to renovate and re-sell.  Even when a  individual home buyer wants to purchase a condo, the mortgage company may require a higher down payment or proof of reserves.

What To Do?

The only thing to do is hang on, price aggressively and keep the condo in wonderful move-in condition.