While national housing economists concur that the next wave of homebuyers will be focused more on shelter than an investment and will steer away from exotic mortgages in favor of more conventional financing, they believe there’s still plenty of value in housing.
“We need to separate the investors from the speculators,” said John Tuccillo, former chief economist for the National Association of Realtors and now an industry consultant. “The flippers are getting out, but the real investors with deep pockets still see tremendous value in some of the price drops around the country.”
Richard DeKaser, senior vice president and chief economist for National City Corp., predicts 40 percent of the nation’s housing is at risk of losing value, but the areas are definitely in low employment, over-built regions. He said consumers who are in the market for a home should forget about stretching as far as they can for a bigger and better home and be more realistic about what they can afford.
“There’s a large group of people who are really stretched out,” DeKaser said. “They should be in a home that’s half as expensive as the one the have. They are finding themselves with a reset mortgage where all of their spendable income is going to the house and they can’t afford to go out to dinner.”
While millions of homeowners are undergoing the payment shock brought by the first adjustment of a low-rate adjustable-rate mortgage, more adjusting – and household stretching – is absolutely on the way. According to a new report released by Morgan Stanley, 25 percent of all secured debt, estimated at $2 trillion, will be reset in the next 12 to 18 months.
That adjustment should be a sparkplug for lenders to begin offering financial consulting as part of their core services, said Jeff Hilligoss, managing director for Residential Capital Corporation.
“The main services have traditionally been mortgages, title and escrow,” Hilligoss said. “But a wealth management component needs to part of the bundle.”
Banking regulators have scrutinized mortgages with low down payments for the past two years, yet lenders have not significantly curtailed those programs. The subject often fuels a controversial question: Have lenders gone too far in extending credit to consumers, or have they simply helped borrowers get into markets unattainable with a conventional loan?
DeKaser believes that while exotic mortgages will enter a period of remission, it’s up to the consumer to make a realistic decision about what’s really possible.
“Lenders have figured out how to price the exotics properly, but consumers did not,” DeKaser said.
While delinquencies and foreclosures have increased in low-employment regions such as Michigan, Indiana, Kentucky, Virginia and Ohio, improved employment numbers nationally will reduce delinquencies in prime markets, specifically along both the East and West coasts. However, Las Vegas, Phoenix, Miami and Washington, D.C., are in for a soft time, economists say.
Interest rates should not be a huge issue in the near future. According to Freddie Mac, the 30-year fixed mortgage rate will average 6.4 percent in the fourth quarter and change very little in 2007. Freddie’s prognosticators say 30-year fixed-rate mortgages should average 6.5 percent, while the rate for one-year, adjustable-rate mortgages will be about 5.5 percent.
“If I was a buyer looking to live in the home, I wouldn’t worry about trying to time the market,” said David Stiff, senior economist with Fiserv CSW. Stiff said the current housing correction “will be far less severe than it was in the ’80s.”
Even though the national housing correction will be a short-term adjustment, some salespeople have never experienced a down market. A majority of the nation’s 1.3 million real estate agents have been in the business fewer than 10 years – the last time a significant downturn occurred.
“Realtors are in for a very tough road,” DeKaser said. “They make money on transactions, and we will see a 25 percent decline over the next 12-month period with all kinds of pricing pressure coming.”
Tuccillo said salespeople will actually have to start marketing again instead of simply taking orders.
“They don’t remember what tools they used,” Tuccillo said. “If they hadn’t seen it before, then they need to find someone to show them what to do now. They have to learn how to work their lists and databases in different ways.”
Tom Kelly’s new book, “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border,” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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