More than half of C.A.R. members have never been through a down cycle, and many find the current housing slump deeply disconcerting.
To navigate this market, it’s helpful to know a little bit about how people behaved during the last market downturn in the early 1990s, and during the recession of 2001. Even REALTORS® who were working then should tread carefully, though, because much about this cycle is uncharted territory.
“The experience we’re having with this market is a confluence of several fortuitous events,” said Kristin Van Gaasbek, assistant professor of economics at California State University, Sacramento. “Even in our last recession in 2001, the housing market did very, very well because we had low interest rates and the innovation of new credit products that allowed a lot of people to qualify for mortgage loans who might not have had access to them before. That created higher demand for housing than you would normally have in a recession.”
This housing cycle, circumstances are very different. Banks have tightened up underwriting standards, cutting off credit to a large number of potential buyers. That makes the market behave more like you’d expect in a slow economy. First-time buyers are more reticent about committing to a 30-year mortgage, and those already in homes are putting off moving up to a larger home.
Problems in the subprime market haven’t helped, either.
“For a while there weren’t a lot of foreclosures and because people had jobs, they didn’t have to sell,” said Bill Watkins, executive director of the University of California, Santa Barbara Economic Forecast. “If they tried to sell and couldn’t get the price they wanted, they just took the house off the market and waited.
“But once you have a foreclosure, you’ve got a motivated seller. Countrywide is not going to pull a house off the market. They’re going to sell it for whatever they can get for it and that is pushing prices down.”
Another key difference is that in the early 1990s, fewer people had consolidated their debt on home equity lines. This time around, many homeowners drew on those lines of credit for big purchases only to find their equity evaporate when the value of their houses declined.
“Now you can’t sell because you owe more than the house is worth,” Watkins said.
C.A.R. Deputy Chief Economist Robert Kleinhenz said today’s homeowners fall into one of three categories: the right house with the right loan, the right house with the wrong loan, and the wrong house with the wrong loan.
The first two categories, he figures, will be alright. “If you’re in a house you can afford with an appropriate loan, you have nothing to worry about. If you’re in a house you can afford but for whatever reason wound up with a loan that’s problematic, you may be able to work out something with your lender to refinance," Kleinhenz said.
The others stand a good chance of losing their homes. Kleinhenz expects foreclosures to peak in the last half of this year. REALTORS® need to be well versed in how to sell foreclosed and bank-owned properties, he said. If they aren’t familiar with those, they need to get some training.
If there’s any upside for REALTORS®, it could be that there is more reliable price data available in this downturn compared with the last one.
“With homes going on and off the market before, you didn’t have as much information about the ultimate sale price because there were no transactions,” Watkins said. “This time around, we have a better picture, and that’s going to help REALTORS® establish realistic prices.”
What this cycle does have in common with previous down markets is the thinning out of support industries such as mortgage brokers and title companies, many of which are downsizing, merging or going out of business.
When the dust clears, those companies are usually more efficient because there are fewer players, so the survivors do more business and hone expertise, Van Gaasbek said.
The cost, of course, is less competition and higher prices for real estate support services, but Kleinhenz said that’s probably only temporary until the market rebounds.
Bottom Line Here
• Interest rates on long-term, fixed, and adjustable mortgages are at historically low levels. The Fed started cutting interest rates to bolster the economy in September, and recently has turned much more aggressive. In eight days in January, the Fed slashed rates by 1.25 percentage points — the biggest single-month reduction in a quarter-century. Since September, the Fed has cut its federal funds rate - what banks charge each other on overnight loans - by 2.25 percentage points to 3 percent. It also cut its discount rate on direct loans it makes to banks by 1.75 points to 3.5 percent. Rates are expected to move lower at the Fed's next meeting on March 18. Despite all this, mortgage rates are starting to creep up. Consumers should lock in low rates now, before they go higher.
• With more homes on the market for longer periods of time, buyers have more choices when it comes to selecting a home today.
• The foreclosure crisis has motivated the government to create more consumer protections against predatory lenders than previously existed.
• A temporary increase in the conforming loan limit means consumers should soon be able to borrow at lower interest rates for higher-priced homes. Prior to the increase, the conforming loan limit was $417,000. The spread between jumbo, or non-conforming mortgage loans and conforming mortgages is about 1.2 percentage points.
Compliments of the California Association of Realtors