Real Estate Investing

I met with a new buyer yesterday who lenders today would be drooling to gain as a client.  He is highly qualified to buy with no real debt, excellent credit, and a great job.  He has already spoken to a very big, very well-known bank about getting a mortgage and what they told him absolutely shocked me from my head to my toes.   But let’s back up …

Recall how this current housing crisis has been caused because banks and lenders pushed people into more house than they could afford.  The people who bought are just as much to blame because they didn’t make sensible decisions but rode the wave of elation that they could buy a much bigger house than they first thought!  Now our economy is in the tank because there have been an insane amount of defaults on mortgages.  Banks / lenders sold these bad mortgages to the big boys on Wall Street who bought them in bundles.  Now there isn’t enough capital to cover the investments and homes across America continue to empty out, all the while neighbors watch houses deteriorate and weeds take over once beautiful yards.

And the Washington politicians feud, grandstanding and arguing during this pivotal election year, an election whose results will quite possibly determine the future economic success or failure of our great nation.

And it all trickles back to my buyer.  He’s sensible.  He’s ready and qualified to buy.  He and other people like him are the key to recovery.  Again, he spoke to the lending department of a major bank this week.  They told him he was qualified to spend up to FIFTY PERCENT OF HIS CURRENT INCOME on a monthly house payment.  Whoa, Nelly.  Come again?  Yes… they told him - even given today’s financial crisis that’s threatening to bring our nation to its knees (and brought the Secretary of the Treasury yesterday to his knee) - that he could spend 50% of his current income on a house payment each month.  Fifty percent.

I find this unbelievable and appalling that people are still being guided to make ridiculous decisions like this when the general rule of thumb is people should spend 25 to 33 percent of their income on a home.  What if my buyer decides to buy a car?  Or gets a credit card?  Or has a medical emergency?  At 50 percent, he would be unlikely to save money toward any type of future emergency.  Even as I rant, though, millions of people do spend half their incomes on mortgages.  The Truth About Mortgages (dot com) reports that according to a 2007 Census Bureau report, over 7.5 million homeowners do just that,

Last year, 38 percent of homeowners with mortgages spent 30 percent or more of their income on housing costs, the limit the government considers affordable.

And more than 7.5 million people, or roughly 15 percent of American homeowners with a mortgage, spent half of their income or more just to pay the mortgage each month.

One blogger says the roots of this current crisis go deep.  The root cause is the basic financial mindset of American society,

We have a collective psyche that refuses to accept that there are limits on what one person can or should acquire, refuses to delay gratification, constantly pushes for more, bigger, faster, shinier things. Our entire economy is predicated on the endless acquisition of material goods. That, and deep-seated insecurity about our own positions in the world.

I’ve heard for years that this consumer market doesn’t put enough money into savings.  Maybe this scare will spur people to take a long, hard look at their spending habits so they can finally see that savings accounts are perhaps better than that new 52″ flat screen television. 

Meanwhile, my buyer was just as incredulous as me when he heard the “50 percent” price.   I asked him to work on a monthly budget plan so he can realistically determine an amount he’s more comfortable with.  He has to do this because obviously some lenders are still pushing buyers into more than they can afford.  Together, we’re looking at home prices that reflect 25 to 30 percent of his income.

Poopsie Pup picture from here.

Home sales did worse than expected in August and signal that a housing market recovery could still be a distant dream rather than a short-term reality.  Not only did existing home sales drop 2.2 percent, but the median existing home price fell 9.5 percent to $203,100, according to FinancialTimes.com. 

Even more grim, the number of properties in a distressed sale is astounding,

“There has been no meaningful change in the level of activity since late last fall,” said Ian Shepherdson of High Frequency Economics.“The NAR estimates that 35 per cent to 40 per cent of all sales are of distressed property, so underlying private activity is weaker than the headlines and there is little sign of imminent improvement.”

Meanwhile investigations are underway into the cause of the subprime lending mess said to be the first domino to fall in the liquifying economy.

Federal investigators have expanded their investigation into the collapse of the subprime mortgage market to include Fannie Mae, Freddie Mac, Lehman Brothers and AIG - four companies at the heart of the market turmoil.

Enforcement officials are under growing pressure to hold companies and individuals responsible for the worst financial crisis since the Great Depression.

These investigations may help to satisfy some of the anger felt by many Americans over what appears to be a bailout for irresponsible financial management.  No matter the fault, however, the rescue plan may not be enough to give housing the boost it needs for a strong recovery.  MSNBC.com reports,

Despite the Bush administration’s historic and head-spinning $700 billion rescue of the financial industry, it will do little to ease lending standards so more homebuyers can qualify for loans, nor has it had much affect on mortgage interest rates so far.

Houses are sitting empty all across the country and the longer the homes remain dormant, the more value they lose.  Vandals, gangs, and mother nature tend to turn neighborhoods with high foreclosure rates into blighted areas.  The Christian Science Monitor recently told about a man arrested for building a new house made entirely of pilfered materials.  The story went on to say,

As the housing dominoes fall far from Wall Street, growing urban “ghost towns” of vacant houses are resulting in a costly crush of weeds, trash, and dereliction on a scale unseen in American cities since the Great Depression, economists say.

With all this brewing, I’m wondering why there isn’t more talk about a moratorium on foreclosures - at least for a month or two to allow the government and investigators time to sort through the loans, to keep homes from being abandoned and empty, and to allow everyone to take a deep breath and settle down a bit.

U.S. Treasury Secretary Henry Paulson placed the blame for the financial crisis and Wall Street meltdown on the “housing correction” yesterday, according to CNN.com.

“The root cause of distress in capital markets is the real estate correction and what’s going on in terms of the price declines in real estate,” Paulson said at a press briefing after the meeting. “So we’re coming together to work for an expeditious solution aimed right at the heart of this problem, which is illiquid assets on financial institutions’ balance sheets.”

Following the meeting, Speaker of the House Nancy Pelosi ironically used a term common in the real estate industry when she said,

“We hope to move very quickly - time is of the essence.”

One way the financial bail out - the largest ever surpassing even the S&L crisis of the 1980s - could occur is an auction type sale,

One way the agency under discussion could work is by setting up bulk auctions to buy mortgage assets from financial institutions. The auctions would be for set dollar amount purchases. Companies that want to offload the hard-to-sell assets from their balance sheets bid to sell to the government at a huge discount. The company willing to sell at the lowest price wins.

Clearly this financial rescue will bolster the economy, but how does it trickle down to help the little guy - homeowners and average joes?  The Miami Herald breaks it down in a great Q&A section,

In theory, this would help keep homeowners from foreclosure if it includes modifying loans that have been pooled into mortgage bonds. In such a scenario, there’d be fewer foreclosures, which would help prevent a deeper downturn in housing prices, especially in neighborhoods that already are experiencing more foreclosures. Again, however, details aren’t available yet.

Not all in Washington are thrilled with the bailout.

Conservative lawmakers and thinkers say they are alarmed by the growing trend of federal intervention. In addition to providing massive loans to prevent the complete collapse of AIG and Bear Stearns, the administration unveiled a bailout plan for the mortgage finance giants Fannie Mae and Freddie Mac earlier this month. Congress also passed a housing bill earlier this year to rescue thousands of Americans facing home foreclosure.

Free market experts agree the question that remains is whether the bailout violates free market principles and sets us up for further failure.

“It’s a dangerous trend,” said Walter E. Williams, an economics professor at George Mason University and a proponent of free markets. “When we bail people out, down the road they’ll engage in risky behavior assuming they’ll be bailed out.”

These are interesting times we live in, my friends.  Meltdowns of the stock market, mortgage rescue, housing in crisis, and a presidential election year make for riveting news coverage.