This past week renowned Yale professor, Robert Shiller, who is also the co-founder of the Standard & Poor's/Case-Shiller home price index, said that home prices could drop another 15-25 percent over the next 5 years. Additionally, he pointed to the reality that the U.S. could follow the path of Japan after its housing bubble popped in the late 1980s.
For those of you that don’t know the history of the Japanese real estate market, it has fallen almost non stop since 1989. Now, to be clear, Shiller did not say that he was predicting that this was going to occur in the U.S. – he is simply indicating that it is possible.
Personally, I think 25 percent is pretty steep unless of course some other major shoes drop in the economy. Sadly, there are plenty of events that could trigger deeper declines in real estate.
As we have discussed numerous times, the main cause for continuation of downward home values is the massive amount of supply of both homes on the market and those in the pipeline.
There are many issues causing this massive problem – high unemployment, lack of consumer confidence and spending, money hoarding by the banks, outsourcing of jobs, a change in population demographics–but the major reason we continue to see destruction in equity is due to the big banks.
As most of us know, after the boys and girls in D.C. (on both sides of the aisle) deregulated the banks, the boys on Wall St. literally went nuts dreaming up creative ways to make money without consideration for the consequences.
Intoxicated with the freedom from almost all regulation the banks pushed out loans with zero restraint. In the good ole days (2002 – 2007) anyone could get a loan: Bad credit, no down payment, low or no income–none of it mattered. The bankers had a loan for everyone and raked in the money doing refi after refi as many homeowners cashed out their equity as the housing bubble grew.
As a footnote – while conventional loans are very hard to come by these days – the FHA loan has taken the place of the “sub-prime loans” of the past. Only needing a 580 credit score, a 3.5 percent down payment (which can be a gift from a relative) and often getting the closing cost paid for by the seller, these loans are the modern day 100 percent (96.5 percent) loan to value. And, while there are plenty of qualified borrowers using this product, there are just as many that have no business buying a home due to low income levels and / or very little money in the bank for the “rainy day.” Unfortunately, many of the FHA loans written over the last 2-3 years will become the next round of foreclosures in the coming years ahead. Keep in mind that even if the market stayed flat, a homeowner only putting 3.5 percent down on a home would find him/herself underwater since it takes approximately 7 percent to sell a home. Unless the buyer gets a “really good” deal, buying a home today is a lot like buying a new car. The minute the deal is done, the new owner owes more than it is worth.
Now, let’s get back to the story - When the real estate bubble burst, the first segment of borrowers to go down were the ones with sub-prime loans. You remember those loans, the ones with horrendous interest rates given to totally unqualified buyers. Sounds familiar! Anyway, that was the first wave of foreclosures and short sales.
Another huge segment of borrowers that are headed into foreclosure are those with the ARM loans. These adjustable rate loans were pushed by the banks to many qualified buyers who were desperate to get into the hot housing market of the early to mid 2000s. Like a corner drug dealer, the lenders pitched these as the “starter loan” because down the road, when they adjusted, buyers were told, “with the rise in equity, you could easily refi when the rates went up or simply sell the home for a huge profit.”
In retrospect, I guess these were not “smart loans” after all since ARM loans, which made the lenders a ton of money five years ago, are now blowing up all over the place. And, as anyone holding one of these loans now knows, there is zero chance to refi, no chance to sell unless as a short sale and surprising no one, the banks aren’t helping you!By the way, we can expect a huge number (Billions of dollars worth) of resets for these adjustable mortgages over the course of the next two years. Mortgage data, from the first quarter of 2011, shows that the rate of Option ARM foreclosures has increased 23 percent during the last 180 days, currently standing at 18.8 percent. This is higher than the foreclosure rate for subprime loans. The current delinquency rate for option-ARM loans is 23 percent and as the loans continue to reset I would expect that number to rise significantly.
Keep in mind that the statistics show that most people who have an Option ARM (where the borrower was able to choose the payment amount) only pay the minimum payment, which is less than the interest owed on the loan. This fact coupled with the falling home values, put many homeowner with this type of loan at 60 percent (or more) underwater. As these loans reset, the result will be an even deeper crisis for the housing market as home values continue the journey down.
I have and could write much more on how the banks not only created this problem, but how they are the ones who are exacerbating it. So despite how you may view the overall problem in housing, as home prices continue to tumble the majority of the blame must go to the B of A’s and Goldman Sachs of the world. And, while B of A (and others) continue to be sued by every Attorney General in the U.S. for everything from wrongful foreclosures, to predatory lending, and as companies like Goldman Sachs receive subpoenas from prosecutors for their actions leading into the global financial crisis, they also pay out billions in bonuses to themselves each year. And, of course, you know where the bonus money came from – that’s right – you and me!
Robert Holt, CPDE/SFR of The [HOLT] Group, RE/MAX Sonoran Hills. For info, visit TheHoltGroupAZ.com or call 623-748-9583 and tell us your thoughts.
Source http://www.thefoothillsfocus.com/
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