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So What Happened and…How Low Can We Go?

By Alison Markham, Broker-Associate, GRI, Realtor® | August 6, 2008

Thursday, April 24, 2008 – By Stefan Swanepoel

In the initial stages of a Recession (yes everywhere people are now referring to the “R” word), sellers remain under an illusion of inflated home values regarding the real value of their property. This false impression of value leads to a drop in sales as buyers respond by pulling out of the market.

At some point (about now), reality sets in and some owners reduce prices. Prices are also driven down by market factors: a growing credit crunch; an increase in the number of short sales; rising foreclosure rates; more banks taking back unwanted properties; cash losses that force property auctions.

Prices are driven price down, developers are stuck with new homes and banks are bulging with foreclosed properties. The median sales price of a bank-owned property ranges between 15% to 45% lower than the median listed price of homes for sale in the same neighborhood. And the largest sellers of homes has become – you guessed it – most likely Countrywide, US Bank, Deutsche Bank, Wachovia, Downey Savings and Loan, Wells Fargo and Washington Mutual.

So how far and how long will this go?

Well I’m no economist and I don’t have a crystal ball, but what I can share with you is that statistics indicate that a normal recession is around 10 months (but who knows what normal is). It seems that predictions are running everywhere from 10 to as many as 24 months before we turn the corner. This is largely founded on the fact that we already have a national “house-for-sale” inventory of around 11 months. U.S. foreclosure filings jumped 57% and bank repossessions are up 129% from a year ago. We can expect some 2.5 million foreclosed properties to be on the market this year and in 2009.

In short – too much stock and too few buyers.

Added to that are mortgage rates, the mother’s milk of the housing market, that seem to be on the rise – both internationally and locally. It would seem that “The 2007 Hangover,” which I wrote about toward the end of 2006 in my annual Swanepoel Trends Report, will provide the industry a headache well into 2009 and beyond.

Lending restrictions add fuel to the fire.

The Mortgage Reform and Anti-Predatory Lending Act of 2007 bars banks from steering any consumer to a loan for which the consumer lacks a reasonable ability to repay, does not provide a net tangible benefit or has predatory characteristics. A predatory loan has never been defined and will surely mean, to a trial lawyer, any loan that a marginal buyer cannot afford anytime in the future. Analysis performed for the Consumer Mortgage Coalition concluded that because of the subjective standards the House bill “will likely generate significant litigation” and lenders will “rarely, if ever, be able to dispose of even frivolous lawsuits”.

So, during these complex and difficult times, this legislation adds a further incentive for banks to stop lending to all but the most qualified individuals. It would appear that for the foreseeable future, low-income homebuyers without stellar credit scores will find it nearly impossible to get any home loan – which compounds the downward pressure on home values.

As if this isn’t already enough bad news, another growing concern is the rapid buildup of household debt in the U.S. Business Week reports that U.S. households now owe almost $14 trillion – nearly equal to the annual output of the U.S. economy. Regrettably, these two are interwoven and one financial crisis feeds off the other.

On the optimistic side: The current recession, subprime mess, and the foreclosure explosion won’t last forever. The years 2006 – 2009 will unquestionably leave a scar, but the American dream of owning your own home will return in all its glory. We may have to wait another year or more but keep the faith. Real estate will once again create wealth and fuel the economy.

Until then, be astute, knowledgeable and remain positive.
Stefan Swanepoel :
Stefan Swanepoel is widely recognized as the leading visionary on trends and change in the real estate industry. He has penned 14 Books, Whitepapers and Reports including the 1998 Amazon.com bestseller, Real Estate confronts Reality (1997) and the annual Swanepoel Real Estate TRENDS Report. His academic accomplishments include a bachelor’s in science, a master’s in business economics and diplomas in arbitration, mergers and acquisitions, real estate, computer science and marketing. Today Stefan serves as CEO of the RealtyU Group, one of the largest career development companies in the real estate industry.

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