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.

CNBC did a piece yesterday during their Realty Check segment that talked about two things:

1. the oncoming wave of bank foreclosures that heretofore have been in the “shadow: and
2. the fact the the number of home buyers in the marketplace will remain low even with record low mortgage rates.

The “shadow” foreclosure market I’m referring to is the vast number of homes that the banks have already foreclosed on but haven’t released to the market for sale.  The thinking was not to glut the market with foreclosures since the idea is to get them sold.  Too many at any one time and they will sit and sit and sit on the market.  That’s not good for the banks.

However, the fact that more foreclosed homes are about to hit the market at fire sale prices cannot be good for the home owner with equity.  If a lot of the houses around you are selling for cheap, cheap, cheap that means appraisers are going to use them as comparables to your house when it come time to sell.  Not good.

Still Not Enough Buyers

The flip side  of that is that there is still not enough buyers in the marketplace to soak up all this housing inventory.  Even as mortgage interest rates continue to fall (now at or below 4.5%) there is hardly anyone buying homes.  Lots of people are trying to refinance but that will become even more and more difficult as home values decline due to the aforementioned foreclosure wave.

Throw in some uncertainty about the future of Fannie Mae and Freddie Mac and you have a humdinger of a dilemma for people who have been responsible home owners and mortgage payers all these years.  It’s beginning to look like the only people who will be able to sell there homes are the folks who bought before 1999 and did not refinance or take out home equity lines.

OK.  I’m confused.

Driving home from meeting with a contractor, I heard that Fannie Mae was reporting that the interest rate for a 15-year fixed rate mortgage was 3.9% — the lowest since records started being kept. When I got home, I checked the Wells Fargo website and, sure enough, an FHA 15-year fixed rate mortgage is 3.75%. A 30-year fixed rate mortgage is 4.5%.

That’s pretty darn low.

Wait!  There’s more!

If you want to roll the dice with an Adjustable Rate Mortgage or if you don’t think you’ll be in your house for more than the next 5 years you can get a 5-year ARM for…wait for it… 2.875%.  That’s not an “FHA” loan.  Those 5-year ARMs are at 3.125%

Why Aren’t Houses Selling?

Even with mortgage interest rates this low, it seems that credit standards are still pretty darn strict.  Obviously, these rates are designed to attract the more pristine of borrowers. People with sterling credit scores, very little debt, good income and a way to document it all. Still, you don’t have to be golden to qualify for an FHA mortgage.  Those guys give you a lot of leeway.  Yes, you do have to document that you can repay the loan. Yes, you do need a whopping 3.5% down payment. Yet, your credit scores can be a little less than perfect and 3.5% is a lot less than 20%.

I’m at a loss.  Interest rates this low should have people lining up around the block for mortgage applications.  Yet, people are still sitting on their hands.  Maybe that’s OK.  Maybe it means that home prices are going to drop even more so that they will be more in line with the pre-bubble years which would put them at 1999 levels.  The unfortunate thing with that is that it will destroy the equity in a lot of people’s homes who bought them between 2000 and 2006.  That means they won’t put them on the market or they’ll go to foreclosure.

Foreclosed home and short sales are not the optimal purchase.  There is usually a lot of repair work to be done “deal” you get in the price is undone by the amount money your need to sink into repairs.  It’s always better to buy from someone who can say “yes” to your offer and even make some repairs as the result of the home inspection.

I’m just downright befuddled.

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 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!

Yes, it’s true.

Congress did not extend, expand or do anything with the home buyer tax credit except to let it expire of natural causes.  If you were able to enter into a legally binging contract of sale to purchase a home by April 30th, you’re on the path.  Now you have to make sure you can get to settlement by June 30th.  Here are a few things that can turn your dream of free money into a nightmare:

1. financing issues — if you want to shop around for an eight of point on your interest rate, if you go out and buy something that throws your income-to-debt ration out of whack or if you’ve gone to a lender that lied to you about their ability to get the loan done.
2. inspection issues — this might come from the home inspector or it might come from the appraiser.  Either way, if something needs to get fixed to get to settlement and it doesn’t happen then settlement won’t happen either.
3. title issues — if there are problems with the title to the house which can include tax liens or, maybe, the home seller is very close to the edge for paying off the mortgage from the proceeds of the sale or a host of other problems then it might take some time to clear up the title enough to be able to transfer it to the home buyer.

There are lots of other things that can happen to slow down the process.  Luckily, there is some time.  The important thing now is to keep your eye on the prize and keep doing the things that need to be done in order to get to settlement by June 30th….and not a day later!