Housing bubbles. Mortgage crisis. Recession. The media reports doom and gloom as it paints the dismal picture of the current status of the real estate industry. Foreclosures are up, home sales are down, financing has all but completely dried up.
Is there a silver lining in real estate? In short, yes. Just like many facets of American economy, real estate goes through cycles. What goes up must come down. Real estate and its affiliate industries enjoyed record peaks at the start of this decade; it only makes sense that the valleys would be just as dramatic.
Ironically, mortgage rates are still incredibly low, especially if you remember the average APR during the Carter presidency. What is changing drastically is the way lenders are calculating risk. Having been burned by allowing loose lending guidelines during the height of the “refi boom,” industry giants like Countrywide and Citifinancial are struggling to stay afloat. The requirements to qualify for a home mortgage have tightened considerably, and the news reports the outcome.
With this lending reform, as subprime lenders almost cease to exist for borrowers with troubled credit and Fannie Mae refuses to buy mortgages that don’t meet suddenly stricter criteria, the media cries “Crisis!”. The truth is, the real estate cycle is just getting back to basics. Lenders are shunning risky products such as 100% interest-only adjustable rate mortgages (ARMs) in favor of the more traditional, and safe, 30-year fixed mortgage with 20% down.
The “crisis” is really just the result that savvy financial experts and layman predicted all along: By allowing such volatile products, combined with lax qualifying factors (such as borrowers with credit scores as low as 580 getting approved for 100% financing on two-year hybrid ARMs, and 103% mortgages that rolled closing costs in and financed above the purchase price/appraised value) the market set itself up for a slew of defaults. Borrowers were over-extended and home prices and appraised values teetered at the very top of their markets. There was no place to go but down. Now, many markets have suffered the bursting of their respective “housing bubbles” as home values that climbed only as a result of the demand (because more people than ever were able to qualify for mortgages) are settling back into more reasonable figures, or even lower, as markets suffer whiplash from the sharp decline.
Most of the nation did not experience a housing bubble, and therefore are seeing only a natural slowdown in the real estate market. The foreclosure rates that are splashed all over the news are sensational media at its best – yes, the rate of foreclosure has risen as much as 75%, but that’s because it was such a low figure to begin with. At this time, taking into account the fact that nearly 30% of American homes are owned free and clear of mortgages, less than 1% of our nation’s homes are in foreclosure. That’s all.
People will always need a place to live, and home ownership continues to be an American dream that comes true. Real estate will rebound just like most economic areas that make up such an essential thread in the fabric of our lives. What the industry has learned, the hard way, perhaps, is that not everyone should be able to buy a house whenever they want. Just like it did before the real estate boom and mortgage mess occurred, it takes planning and responsibility to be a home owner. Putting people into the biggest debt/financial investment of their lives before they are ready is as much as disservice to them as it is to the economy as a whole. We all feel the effects as home value inflation and poor lending practices ripple outward.
Real estate should never be counted out. Think of it as your favorite college sports team: often their winning records decline a year or two after they claim a championship because they lost a few star players to graduation. But fans know that it’s just a rebuilding year. They’ll be back and winning again soon enough. Just hang in there during the lean times.