Sky Not Falling

The Sky is Not Falling
*By Dan Hendricks

  •    If mainstream news media is your only information source, you may believe that today’s housing market is a “sky is falling” proposition. While today’s market is certainly challenging, a little history and wider information net provides some unmistakably positive signs.
     The housing market is very cyclical. In the mid-1970s and in the early-1980s and 1990s, housing production and sales dropped by more than 60 percent in a matter of months. In all cases, the market bounced back to post record gains. The median price of a new home in 1991 was $120,000. In August, the median price was $225,700- up 88 percent.

History’s lesson is that down housing markets invariably turn upward. And the “down” of this market is nowhere near the down of previous markets

Without question, a substantial number of Americans face the pain of foreclosure; a disproportionately high number of them are sub-prime borrowers with adjustable rate mortgages (ARMS).
A closer look at the credit crunch, though, is instructive. According to the Mortgage Bankers Association (MBA), California, Florida, Arizona and Nevada account for more than one-third of the nation’s sub-prime ARMs.

Nationally, more than 85 percent of sub-prime borrowers with ARMs are paying on time every month. In fact, according to the MBA, if not for the increase in foreclosures in these four states, we would have seen a nationwide drop in foreclosures in September.

    More than 97 percent of prime borrowers- the bulk of the mortgage  market- are up to date on their payments. 

37 percent of all single-family homes are owned debt free-without any mortgage-and homeowners nationwide have built up more than $11 trillion in equity.

   For most existing homeowners, the fact is their homes will be worth significantly more than they paid for them once the market begins to recover - a process that is expected to begin in 2008.

   “Nationwide credit crunch” is also a misnomer that needs to be addressed. Outside the sub-prime arena, mortgage markets are functioning normally. While underwriting standards may have been tightened, credit-worthy home buyers should have no problem in finding a conventional, conforming mortgage.

   Mortgage financing for borrowers with solid credit remains available for a conventional loan limited to $417,000, and rates remain near historic lows at just above 6 percent.

   The current housing price correction is helping to restore affordability. Prices have leveled off, or even declined in some areas, making this the best time to buy.

                                       **ECONOMY’S  BRIGHT SIDE**
   Past down markets in the housing industry have largely been mirrored by a struggling national economy. By most accounts, though, today’s economic outlook is much more positive.

   The U.S. economy expanded at a 3.9 percent annual growth rate in the 3rd quarter, which was greater than the 3.8 percent growth rate in the second quarter and above economists’ forecast of 3.1 percent.  
                *Daniel M. Hendricks is executive director of the 
                Home Builders Association of Greater Cincinnati

It’s feast or famine. Last week record slow and this week record busy. how’s the rest of you out there across these fruited plains and amber waves of grain doing?

Very busy here last month.
Still steady this month.

Residential in the toilet, commercial holding strong.

You guys have it all wrong.

NEW YORK - If the government really wants to stop home foreclosures from surging, here’s a simple plan: Boost Americans’ income, put more funding toward medical research and insist on marriage counseling for all. And then start buying up land to raise housing prices.

As far-fetched as all that may sound, such efforts would do more to curb default rates than the Bush administration’s plan to freeze adjustable mortgage rates in the coming years for a limited number of subprime borrowers.

Data from Countrywide Financial Corp., the nation’s largest mortgage lender, backs up this point. The No. 1 reason its customers have been defaulting on mortgage loans is because their income was cut. That accounted for almost 60 percent of its loan defaults in the first 10 months of this year; add in sickness and divorce and the total jumps to more than 80 percent.

Way down on the causes-for-foreclosures list at Countrywide – just under 2 percent – is a payment adjustment.

In other words, there’s little evidence so far that the mortgage mess is a product of cash-strapped home owners being crushed by resets on adjustable-rate mortgages, or ARMs, that send their monthly payment soaring.

That could change as ARM rate resets pick up speed in the months ahead. Bank of America estimates that will peak next year, with $361 billion subprime ARMs shooting higher, and $148 billion will reset in 2009. Still, the Countrywide data give a clear view of what may really be pushing some homeowners over the edge.

That undermines the notion that the government’s biggest move yet to deal with the credit and housing crisis will have a dramatic impact – or lessen the chances that the economy will fall into a recession just as the presidential election year begins.

The Hope Now'' program unveiled last week by President Bush and U.S. Treasury Secretary Henry Paulson is aimed at helping home buyers with spotty credit histories who chose ARMs that had lowteaser’’ rates for two to three years. The idea is to freeze rates on these loans at their current 7 to 9 percent range – well below the 11 to 13 percent rates they would reset to in subsequent years.

Those eligible must be subprime borrowers who took on a mortgage from Jan. 1, 2005 through July 31, 2007, live in their homes, have low credit scores and are current on their payments. They must be able to prove they can’t afford the higher mortgage rates when they adjust.

Some 1.2 million households could be affected by the plan, at least by the government’s estimates. Analysts see the numbers coming in much lower at around 350,000, given the strict eligibility requirements.

Whatever the number, the Countrywide data provides stark evidence that this plan will serve at best as a Band-Aid on a gaping wound, as does a new Federal Reserve Bank of San Francisco study that showed changes in home prices are ``far and away the best single predictor’’ of subprime delinquencies.

It suggests that once a home’s value falls below the amount owed on a mortgage, borrowers tend to then view the default option as being ``in the money’’ and exercise that option.

Current conditions indicate just that. Housing wealth fell in the third quarter for the first time since 1993, by $128 billion, according to Merrill Lynch, as increases in mortgage debt outstripped the value of real estate assets.

``Unless the government is going to establish land banks to prevent continued house price deflation, it really is questionable as to whether this ‘Hope Now’ policy is really going to stop a ‘Foreclosure Later’ environment,’’ said David Rosenberg, Merrill Lynch’s chief North American economist. He noted that home prices have dropped 5 percent so far this year and his firm is forecasting another 10 percent decline from current levels in the coming year.

Evidence that those who have had their mortgages modified as they moved toward foreclosure still go on to default is adding to such worries.

Consider that during a housing boom, re-default rates two years after a loan modification are close to 25 percent in the conventional mortgage market and 40 to 60 percent in the weaker mortgage areas, including subprime and Alt-A, according to Joshua Rosner, managing director at the independent research firm Graham Fisher & Co.

If that happens in the best of times, think about what could go on now as prices are tumbling. That means this mess could drag on

Gee, thanks for telling us.:roll:

How do you propose that the “government boost people’s income”?

I don’t support bailouts no matter where they come from but again what are the specifics of what you propose?

Is this a story from somewhere?

It was written by Rachel Beck From the Associated press. It appeared in today’s Sun Sentinel.

Thanks, Do you happen to agree with her?

The Associated Press now there is a newspaper that loves the current administration;-)

Don’t they all Randy? :wink:

If she believes what Countywide is saying then- well Ive got some land in the Everglades for sale.

Countrywide is one of the companies that was pushing all of these sub prime, interest only, etc. loans and making a fortune on them. Now they are touting turning those loans in 30 year fixed loans. Guess who is making the money again. Its a nice little racket they have going on and the problem is, most of America is fooled by it.

As for Bushes plan - I think he is only delaying and proloning the agony. So now for five more years people can stay in their homes. What happens when the five years is up and those loans adjust. We will just go though all of this all over again (although it may not be as severe.

William, you and I seem to be on the same page. Sorry for my misunderstanding of your post.

It is surely a scary situation.

Very Busy

The key word here is Bush, and not the beer :D. For some reason this is never in the news. But if you remember it was George’s brother that was a major player in the savings and loan scandal in the 80’s. They used the same tactics they are using now, ARM mortgages. This increases foreclosures, which brings down the market value, which can cause interest to raise, then leads to a recession. This is all happening right before the next election. Must be a coincidence. :wink: