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October 17, 2011

Mortgage Markets Teetering Again

Despite unbelievably low interest rates of under 4% on a 30 year fixed mortgage, the housing market is once again showing signs of growing distress. Last week, RealtyTrac announced that foreclosures were on the rise once again. This, along with declining valuations in mortgage indexes, shows a general trend that housing is getting worse.

So, why is housing still slumping?

1) There is a surplus of houses, just not good ones.

According to the U.S Census website, 75.75% of all vacant homes in America are vacant “year round.” This implies that these homes are basically abandoned. This number peaked at 76.6% in the 4th quarter of last year, but it is currently on the rise. In comparison, this percentage was 74.3% in the first quarter of 2009. In relative numbers, we are talking about between 14 and 14.2 million homes.

These houses are in bad shape and require investment. Unless someone has 20% down for a conventional mortgage, they are at the mercy of federal regulations in order to reduce their down payment. Federal regulators (the most popular being FHA) are very picky about inspecting these homes. The requirements the create could be very pricey.

For example, the average home sells for about $140,000. On a conventional mortgage, this would create a down payment of $28,000. An FHA mortgage would have a down payment of $4,900. This saves $23,000 in upfront costs. However, FHA is known for requiring a new roof, new windows, and/or a new heating/cooling system. Each of these can cost $5,000 or more. This greatly reduces the spread between a federally insured and conventional mortgage. In this economy, that type of cash is not readily available to buy a home, especially one that is not likely in good shape.

2) Still no jobs.

With jobless claims remaining over 400,000 per week and unemployment still over 9%, Americans are not confident enough in their employment situation to make an investment into a home. The homeowners who’ve lost their jobs foreclosed on their homes and won’t be able to buy again for years. I would estimate that a third of workers are in no financial condition to buy a home. This is interesting considering less than 30% of workers did not own a home before the crisis.

3) No incentives exist to own multiple homes.

While the government continues to pump billions in stimulus packages to renew the dream of home ownership, they continue to ignore the opportunity to incentivize people with cash to make multiple home purchases. As stated in previous blogs, had the foreclosure freeze not occurred, private investors could have come in, bought homes facing foreclosure, and sold them back to the occupants at a spread that reduced the occupant’s monthly payment, but still made a profit for the buyer.

The government, however, is focused on putting people with no money into positions of homeownership. This has been proven (in the past decade) not to work. By incentivizing people with the capital to buy more homes, the government can see the result of putting people who cannot afford homes, into homes, at cheaper rental rates.

Unfortunately, it appears this could be done by Fannie and Freddie. If this is the case, there will be less of an incentive to maintain the property and housing values will continue to depreciate. The government needs to provide incentives for any private actor to invest in housing and help end the inventory crisis.

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