There are no courthouse default notices, and it is unlikely for real estate investors to go knocking on the white house doors to try to purchase it as a short sale. Although a government default is not quite the same as a default on your mortgage, a government default will nonetheless have consequences in the housing market.
A U.S. default would be uncharted economic waters; there is no way to know exactly what will happen – but it will most certainly not be good. When speculating about the consequences of a government default, some talk about 1930’s Germany and 1990’s Russia; these defaults occurred for different reasons and had different outcomes.
Experts discuss a possible consequence of a government default to be an almost immediate economic recession, which could rapidly evolve into a depression. The resulting shock from a possible economic contraction would filter through the economy and would no doubt result in mass layoffs. And just like the most recent recession, mass unemployment had deleterious effects in the housing market and real estate industry resulting in waves of foreclosures and property devaluation.
Other possible outcomes of a default could be runaway inflation, sky high interest rates, and/or general economic calamity. In these scenarios, forget about a housing recovery; home buyers could find it exponentially difficult to obtain a mortgage to buy a home. Homeowners who have fixed rate mortgages should be safe from payment increases; however those with adjustable rate mortgages could possibly see interest rate increases hitting adjustment caps.
In an October 9th article, Morgan Housel wrote (“What Happens If the U.S. Defaults on Its Debt?”; fool.com); “…Those holding bad mortgage debt fared the worst in 2008, but financial pain spread throughout the entire financial system, and to areas that had nothing to do with real estate. The reason was fear. If the global financial system is built on credit, it is supported by trust. When you remove trust, people hide now and ask questions later. The system freezes. I don’t want to lend to you because you might hold something bad, or be lending to someone who is holding something bad, or be lending to someone who is lending to someone who is holding something bad. So people just wait. Credit stops flowing, and as we learned in 2008, that simply devastates the economy… But a credit crisis doesn’t need to last long to bring the house down. Lehman Brothers was well capitalized two days before it was bankrupt…”
Fear is a very powerful emotion that can be used to influence popular beliefs and behavior. As congressional budget talks have been at a standstill, talk of a government default seems to be on everyone’s mind as we approach the debt ceiling. And although we fear a government default, the distinction must be made between default and debt ceiling.
Put in a very simple way: raising the debt ceiling is akin to asking for an increase in your credit card limit. However, you don’t default just because your credit limit is not raised; you default when you fail to make payments on your debt. Even if there is no debt ceiling increase, many experts agree that a chance of a U.S. default is slim; it has been estimated that treasury revenue is much more than the amount needed for debt servicing. Regardless, the fear of a government default is enough to chill the housing market.
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
At a recent round table meeting chaired by local real estate agents and lenders, someone asked the Realtors® to describe current market conditions. Although descriptions were given with pride and confidence, they were not different from the depictions that have been reported throughout the year; the responses seemed shallow and pedestrian.
Attendees were hoping for responses that demonstrated a grasp of the local housing market, but instead they got a media narrative that doesn’t tell the whole story. One agent eagerly provided her response saying, “there is a lack of inventory, making it difficult for buyers to find a home.” While another agent described how home sellers need to be realistic about home prices because buyers are wary of paying higher prices and continued appraisal issues.
To say that housing inventory is low is not telling the whole story. Local housing market activity during 2013, not unlike conditions reported around the country, felt like the peak market conditions of eight years ago – but for different reasons. Montgomery County’s active single family home listings through September 2013 increased about 7.7% compared to the same period in 2012, as reported by the Greater Capital Area Association of Realtors® (gcaar.com). Although county single family home active listings are less than half that were recorded in 2007; consider that SFH actives are also at about the same level reported during 2005, which is considered to be the peak market.
Although the number of homes listed may be close to the same levels of the peak market, SFH closings are reported to be about 34% lower than the number reported during the same period in 2005; and SFH contract activity is about 30% lower than 2005 as well. Even though the market has seemed as if it has been the most active in recent years, SFH contract activity is slightly lower than the same period in 2009.
And although home sale prices have rebounded somewhat, average sale prices continue to be way below what they were during the market peak. It is easy for home sellers to grasp on the reports of double-digit year-over-year increases; however, sellers who expect the same return are disappointed. The year over year jump in home prices are explained by some experts as a statistical phenomenon produced by the sharp decrease in distressed home sales (e.g., foreclosures and short sales). This can be accounted for by the nominal month-over-month increases in average home sale prices through 2013.
Home sale absorption rate through 2013 has been similar to that of 2012, considered to be the housing market bottom. Absorption rate measures the pace of home sales by comparing monthly sales to the same month’s listings. This similar pace may indicate that the increased activity during 2013 may not be due to “pent up demand,” which has been a popular narrative by economists; but rather it may signify the underlying strengths in the marketplace.
That being said, the housing market is co-dependent on overall economic conditions. As mortgage interest rates have slowly risen, we have seen a resiliency in the market as home sales have remained stable. And as some economists are talking about the possibility of the double digit interest rates in the future, it appears as if a slow and deliberate increase has not yet deterred home buyers.
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
Yes, another column about the federal government shutdown (like you need to read another column about the shutdown, right?). Although it is expected that the majority of home purchases won’t be affected by the shutdown, home buyers and sellers should be on their toes to avoid possible pitfalls; buyers and sellers should be aware of what could affect their purchase/sale. And even if both houses of Congress agree to some continuing resolution before publication, the shutdown information could be useful during the next budget battle (which is likely to occur in about two weeks).
Many experts agree that the government shutdown won’t last long. Regardless, there is a consensus that the longer the shutdown continues, the potential increases to impair the housing market. Additionally, some experts expect the shutdown to dovetail into an anticipated bitter debt ceiling battle later this month.
It has been widely acknowledged that the recovering housing market has been a major contributor to the 2% GDP growth. Economists have agreed that it would be logical to maintain government functions that compliment and support the still fragile housing recovery.
However, regardless of what you hear; the shutdown will certainly affect the housing market. Some mortgage originations and closings will be affected, and some buyer activity may be put on hold until the government shutdown ends (like the sequester). Although there appears to be a commitment to maintain FHA and VA loan operations during shutdown, new loan processing may experience delays (Federal department shutdown contingency plans can be viewed on Whitehouse.gov).
FHA’s (Department of Housing and Urban Development) contingency plan states that: “The Office of Single Family Housing will endorse new loans under current multi-year appropriation authority in order to support the health and stability of the U.S. mortgage market. (FHA endorsements currently represent 15% of the market.) Approximately 80% of FHA loans are endorsed by lenders with delegated authority. The remaining 20% are endorsed through the FHA Homeownership Centers, leveraging FHA staff with a contractor that works on-site.”
The VA’s (Department of Veteran Affairs) contingency plan states that during 1995-96 government shutdown, “Loan Guaranty certificates of eligibility and certificates of reasonable value were delayed.” However, learning from that experience, the shutdown contingency plans indicate that there will be 95% of employees who are either fully funded or required to perform “excepted” functions.
Conventional loans should be unaffected as Fannie Mae and Freddie Mac operations continue through the shutdown; Fannie and Freddie operations depend on lender paid fees.
Unlike shutdowns in the past (the last Federal shutdown was 1995-96), approximately 90% of all current mortgages in the country are insured, guaranteed, and/or purchased by federal entities. During the last shutdown, a thriving private sector mortgage industry existed; private investor groups that purchased mortgages on the secondary market, as well as many portfolio lenders (lenders that keep and service loans they originate) offered alternatives to home buyers. During the last shutdown, home buyers who were unable to obtain or wait for government loan approval, had other options for financing that included “Alt-A” and sub-prime mortgage programs that seem to not widely exist today.
If you are planning to settle on a home in the next few days, confirm with your lender that there are no delays. If you are in the process of looking for a home, check with your loan officer about a reasonable closing date before you enter into a sales contract.
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
After much speculation, mortgage interest rates appear to be on the move. Even with rising interest rates, rates are still relatively low. Some economists expect that when the Fed’s Quantitative Easing program begins tapering, mortgage interest rates may jump due to financial market volatility.
Many fear that rising interest rates could derail the recovering housing market. In an August 19th news release (realtor.org), Chief NAR economist Lawrence Yun stated that although the pace of home sales are at its highest since February 2007, the market could be experiencing a “temporary peak” due to home buyers’ seeking to close deals before interest rates rise significantly. Looking ahead, Dr. Yun expects that rising interest rates and limited inventory could create an imbalanced market due to inconsistent home sales.
Home sale prices also have been rising, prompting bidding wars, as the median home sale price was reported by NAR to have maintained nine consecutive months of double digit year over year increases. However, Dr. Yun stated, “Limited inventory in some areas means multiple bidding remains a factor; 17 percent of all homes sold above the asking price in August, although 63 percent sold below list price.”
This week’s release of July’s S&P/Case-Shiller Home Price Index (spindices.com) also revealed that home sale prices were still holding onto the double digit annual rate of gain over 2012 levels, as the 10 city and 20 city composites posted about a 12% year over year increase for July. However, it is pointed out that home price are still “far below their peak levels.”
The sharp increases in home sale prices sparked fears of another housing bubble. But price gains only increased about 2% from June to July. Monthly price gains have lessened, and the gradual slowdown of home price gains may indicate that home prices may be peaking. Chairman of the Index Committee at S&P Dow Jones Indices, David M. Blitzer, stated, “Following the increase in mortgage rates beginning last May, applications for mortgages have dropped, suggesting that rising interest rates are affecting housing. The Fed’s announcement last week that QE3 bond buying will continue for the time being may have only a limited, though favorable, impact on housing.”
The rapid increase in home prices has affected potential appreciation for many home owners who waited to sell their homes. And the increased inventory provided additional housing stock for eager home buyers. Given the recent increases in home sale prices, the expectation of an uncertain real estate market may not be welcome news by home buyers and sellers.
But home price increases have not only helped the housing market, but the economy as a whole. CoreLogic (corelogic.com) reported that the housing sector contributed about 17% to GDP growth during the first quarter of 2013. However, CoreLogic predicts that increasing mortgage rates will directly affect the housing market, and indirectly affect the overall economy: Single family housing starts (new homes) are thought to be declining because of increasing mortgage rates; and CoreLogic estimates that long term GDP growth to be about 1.75%.
It remains to be seen if modest increases in mortgage interest rates have been beneficial to stave off another housing bubble. However, given that the indicators and experts point to a housing recovery peak; increasing mortgage interest rates could suggest caution for the housing market.
Original located at https://dankrell.com/blog/2013/09/26/rising-interest-rates-a-help-and-hindrance-to-recovering-housing-market-2/
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
Five years ago this week Lehman Brothers filed for bankruptcy and almost immediately initiated the financial crisis. What followed in the wake of the Lehman Brothers collapse was a domino effect of financial sector failures which resulted in: a number of bailouts and government takeovers of failing entities; finger pointing and blame for the foreclosure and financial crises; and a number of laws to address the issues that are thought to have contributed to the crisis.
In retrospect, the financial crisis may have been circuitously the result of the foreclosure crisis, which was entering its second year. At the end of 2006, the real estate market was already seeing a major shift from the record breaking seller’s market, to a market that saw inventory climb to record highs. At that time I wrote about how nationwide foreclosures had increased 27%, and how economists were expecting existing home sales to continue at the same levels into 200, which was to initiate a housing recovery.
By the spring of 2007, the experts’ opinion of a short lived foreclosure crisis was not to be realized; and the blame game for the foreclosure crisis was in full swing. Trying to make sense of the foreclosure crisis, almost daily media reports of inflated appraisals and misrepresentation of mortgage terms were popular. At that time there was no way to pinpoint one source for the crisis. While the foreclosure crisis was in full swing, we did not have the perspective to understand all the participants and components that contributed to the resulting Great Recession.
Testimony to the Financial Crisis Inquiry Commission in 2010 included descriptions of the CDO (collateralized debt obligation) market. Financial brokers packaged mortgages into CDOs and sold them worldwide; the returns for these CDOs were so good that the demand was seemingly insatiable. As the demand for CDOs increased, the number of mortgages that were needed also increased. To meet the increasing demand of mortgage production, the temptation to bend the rules and lend to almost anyone seemed to be at the heart of this piece to the crisis; and many of those mortgages were subsequently foreclosed. The fraud seemed to reach in other areas too, including financial rating agencies that graded subprime CDOs as “AAA” to make them more appealing.
To improve accountability and transparency in the financial system, to protect consumers from abusive financial services practices, and to end “too big to fail,” the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted. The broad and wide sweeping Dodd-Frank legislation created the Consumer Financial Protection Bureau and the idea of the Qualified Residential Mortgage. Although the legislation has been widely acclaimed; there are many who remain critical of the legislation, saying that the markets could be set up for the next crisis.
Only in retrospect we can begin to understand the complexity of the dynamics which brought about the almost collapse of the financial sector through the mortgage markets. And while there have been a number of hearings, books, working papers, and dissertations about the causes and effects of the foreclosure and financial crises, we still seek to condense complex issues into a digestible statement. If a movie is produced about the financial crisis, the slugline might be: “Financial crisis that was a result of fraud that took advantage of a hot real estate market and easy money.”
Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.
