Midyear Real Estate Report: It’s Bleak

Yesterday’s national unemployment figures provide further evidence that our nation’s economic “recovery” may be sputtering. The performance of the local real estate market over the first half of 2010 tends to confirm that conclusion. For the ten communities in the Middlesex North Registry District (Lowell and nine surrounding towns), the number of deeds recorded from January through June was up slightly from the same period in 2009 (2420 in 2009 t0 2698 in 2010, an increase of 11%), but the number of mortgages recorded was down substantially, dropping from 8021 in 2009 to 5374 in 2010, a decline of 33%. At the same time, the number of foreclosure deeds recorded rose from 195 to 345, an increase of 77% and the number of “orders of notice” (the document that signals the commencement of a new foreclosure), more than doubled, climbing from 298 to 655, a jump of 120%.

Several factors contribute to this bleak picture. The most immediate is an extreme tightening of lending standards by banks and mortgage companies. What’s happening now is a classic example of over reaction in an industry. From 2003 to 2008, the only criteria needed to receive a loan of more money than you even asked for in the first place was to be breathing. Income history, repayment ability, credit worthiness – none of that mattered. Now it seems that the pendulum has swung way over in the other direction with hardly anyone being able to receive financing. There was much talk earlier this week about the need for Congress to extend the deadline for closing a purchase to be eligible for the Federal home buyer tax credit beyond June 30. Incredibly, Congress acted and pushed the deadline to September 30. But that extension will make little difference if buyers are unable to obtain the financing they need in the first place.

The second negative factor is the imbalance of current values versus outstanding mortgage amounts. An incredibly large number of people – it’s difficult to quantify exactly how many – simply owe more on their homes than the property is now worth. This is not necessarily a result of recklessness on the part of the homeowner. Prices in 2005-07 were just historically (and perhaps irrationally) high, but everyone has to live somewhere and with banks not only willing but anxious to lend (back then) substantial amounts of money, it’s easy to understand how so many wound up in this situation. Now, high foreclosure rates and a scarcity of buyers able to obtain financing continue to drive down values, putting more and more people into this hole. Many homeowners are trapped, with the only options being to keep paying monthly payments that will never translate into equity in the home or walk away and face foreclosure and the devastation of one’s credit rating. Most people choose to sit tight, but that’s dependent on a continued stream of income to provide for the payments. A few years ago when anyone asked me “what’s going to happen with real estate?” my answer was “what’s going to happen with unemployment?” and that remains the case today. When a homeowner loses a job, it’s likely another foreclosure will result. (That’s just one of the reasons why the US Senate’s recent failure to extend unemployment benefits was such a bad decision).

Sorry to be so pessimistic on this holiday weekend, but that’s the way I see it.

5 Responses to Midyear Real Estate Report: It’s Bleak

  1. Michael Luciano says:

    I think all the first time home-buyer tax credit did was kick the can down the road. (“First time” by the way defined as anyone who hadn’t bought a home in three years.) It may even delay the eventual real estate recovery and I don’t think anyone can say from a macro perspective that this program was worth it since we still have a ways to go before prices head in the other direction.

    The key to all of this is obviously jobs. The government tried to create jobs through TARP (by recapitalizing banks so they start lending again), the stimulus, and zero percent lending rates. But a funny thing is happening: the large banks aren’t lending. They’re too busy shelling out bonuses and buying treasuries with the money the Federal Reserve lent them at 0% so they can scoop up the interest. Naturally this means the government (i.e., taxpayers) will be poorer than before. Despite all the warnings two years ago about looming inflation, the global credit crunch has produced massive deflation. Hence no job creation; hence no real estate recovery; hence no sustainable economic growth.

  2. DickH says:

    I don’t disagree with your comments. I do think the home buyer credit (it was modified to include more than “first time” buyers) did create some excitement in the real estate market. A lot of potential buyers were deferring commitments in the hopes that prices would decline further and this gave just enough incentive to commit. There was a frenzy of Purchase and Sales agreement signings at the end of April as evidence of that.

    But now, these same buyers can’t get financing. It could be, as you suggest, that banks have better places to put their money. There’s also that reactionary swing from one extreme (no standards) to another (impossibly tight standards).

    More than anything else, the extremely high prices that were reached at the peak of the real estate bubble have trapped many people in their homes. I don’t know how you solve that. Trying to re-inflate prices would just be revisiting the types of mistakes that got us into this mess in the first place and there’s really no way to do a blanket discounting of home indebtedness, especially when people are still able to make their monthly payments. It’s just that those people are stuck in their homes, unable to sell. In that setting, things like divorce, death, illness or job loss make keeping the house unsustainable.

  3. Righty Bulger says:

    Which is why people argue against any government intervention, even when on the surface it sounds like a good idea. Ultimately, there has to be pain before there is gain.

    Home prices were overinflated. Like any product, houses are subject to the laws of supply and demand determining price. Land got too expensive. Too many high priced homes were built in an effort to recoupl the money spent on the land. Those that could afford expensive houses gobbled them up, but far too many who couldn’t afford them did so also. Our government was far too eager to see lending institutions give everyone a chance at the American dream. It created a false sense of a booming economy, when underneath the surface, good paying, sustainable jobs were disappearing and going oversees. Once the recession hit, it all hit the fan.

    Had the administration, Bush and Obama’s, allowed the market to correct itself, we might be on the verge of recovery instead of a double dip recession. Instead, they tried to bail everyone out and stimulate private sector spending when people no longer have the money or the stomach to spend. So you now have people still losing their homes, lending institutions that either aren’t lending or still in danger of going under. Topping it all off, you have a government so far in debt it can’t afford another stimulus program.

    You’re not being negative Dick. You’re being honest. We need more honesty, not more pie in the sky projections that tell us if we go out and spend on a personal and on a government level, everything will be allright. It’s not going to be.

    We’re undergoing a sea change in this country. People need to batten down the hatches. Save as much money as possible. Buy only what you need and what you can afford. Forget about stimulating business. All you’re doing is stimulating corporate profit takers more interested in a company’s stock prices than the overall health of the company and its ability to create jobs. America’s economy has lost its way, and only a return to good old fashioned financial practices will help it find its way back.

  4. DickH says:

    I agree that our country is in need of a nationwide reset when it comes to the balance of borrowing v savings by individuals. Borrowing against home equity to maintain a middle class lifestyle was one of the root causes of the financial collapse. But a big part of the problem was the frustration felt by middle class Americans by wage stagnation. The Bush era tax cuts caused a mammoth transfer of wealth away from the majority of Americans to the most wealthy. And yes, government was happy to reign in the regs against reckless lending because of the immense tax revenues generated, but the run up was driven mainly by people making a whole lot of money off of these risky lending practices. So the mistake of government was in reducing regulations even as it was a co-conspirator.

    From its very beginning, America has been about government stimulation of the economy. Much of the early Industrial Revolution was driven by the precision machine work done in the Connecticut River Valley. That was all an outgrowth of the Federal Arsenal at Springfield, Mass – a government program. The mighty farms of the midwest wouldn’t have been possible if the government had not financed the creation of the trans-continental railroad. Same with rural electrification and irrigation projects. The boom years of the 1950s were fueled by the GI Bill and war-era research and development converted to peace time use.

    Repeating the myth of the self-made man and the rugged individual make us all feel good but they are indeed myths. Between the individual and big business, big business always prevails. That’s why government must serve as the referee that can level the playing field and not as a house servant of the very wealthy.

  5. Michael Luciano says:

    Dick, very insightful comment. Let me say that the problem with all the government spending since the financial crisis is that it’s not getting into the right hands. Rather than spend trillions of dollars propping up the financial services sector, the government should’ve spent more money on stimulus (directly) and through the states instead of giving it to banks hoping they’d irrigate the money through the broader economy.

    And thank you for pointing out how the government has long been involved with the economy in this country. I don’t think we’ve ever had a truly “free” market here or in any other industrialized country. In fact, intervention/protectionism is generally required to protect emerging markets. Recall the South’s complaints about high tariffs on British goods which were cheaper and better made than what Northern manufacturing produced. But without those tariffs, the industrial revolution in American doesn’t take off. Similarly, the US faced its most rapid and dramatic economic growth in its history in the 1940s when government intervention was at its highest. Rationing, price controls, massive government spending in what was a virtual command-style economy.