Freddie Mac is reporting that mortgage rates have hit a low for the year. This news is being met with commentary about how borrowers and buyers seem unaffected. Housing starts are down, purchases fell off a cliff the last 4 weeks…if rates are so great, where are the borrowers?
Here are a couple of clues.
First, and perhaps most importantly, it is really, really hard to sell a house when you owe more on it than you can sell it for. If you short sell, or send in the keys, your credit will not permit you to become a buyer for a good long while. There are some million plus people that ordinarily would be prime candidates for purchase that are in this group. There are tens of millions – some estimates have up to 25% of the homeowners in the US – that are unwilling to trash their credit and therefore cannot sell their homes. Not all of those people (me, for instance) are interested in moving, but a lot of them are. That takes some ten million more people out of the market.
But if it were only that, I think the low rates would be having a significant impact. Unfortunately, there’s something worse happening.
This is the second problem. Let me use an analogy here. Getting a mortgage loan is like running. Once upon a time, say, 2006, getting a loan was a lot like running a 100-yard dash. Practically anyone can do this. They might not be very fast, but it is likely that all but the very most obese would be able to run 100 yards without stopping. Roll out of bed, go to the track, run 100 yards. Roll out of bed, go to a loan officer, get a loan for a home. Pretty much, that was that we had four years back.
Fast forward to 2010. Lenders are terrified. Foreclosures are everywhere. 10% of the workforce is officially unemployed, with another 10% or more practically so. The only hiring going on is being done by the US Census. Homes are underwater. It’s not a good lending environment.
Add to this something we forget, and that is that low rates are good for BORROWERS, but they suck for LENDERS. If you’re getting 10% on your money, a higher foreclosure rate won’t kill you. When you get 4.5%, it does. So let’s just sum up with “lenders are skittish”. When they get skittish, they lock down on qualifying.
Roll out of bed. Go to the track. Run a 10k.
Most people cannot do this. The average Joe and Jane are unable to run 6 miles without stopping. There is a segment of the population that can, of course. You know which ones those are, because they are actively running, and quite regularly. But out of the next 100 people you meet, how many could run 6 consecutive miles? 10? 5? Not many. Many people, say another 35-40, could be able to run a 10k in 90 days or so. They’d have to train, but no major lifestyle changes would be necessary. The other 50? They would have to significantly alter their diets, start getting some limited exercise, and train up. It would take a while. Six months. For some, a year. For some, it would never be possible, whether for health reasons or sheer unwillingness to change.
And that’s where we are with mortgage loans. There is a segment of the population that can qualify just by showing up. It’s a small segment now, and it’s the segment that is financially savvy, very careful, saves money, made a sizable down payment and/or bought their house several years ago and never cashed out of it. That’s 10-15% of the population. Then there’s another 35% or so that might be able to qualify if they worked at it. They’d have to pay down some debt, fix up the house, sell a car. Save some money (this one is the kicker). Many of these people have credit issues that need fixing. But a little guidance and they can get there.
Problem is, they don’t get the guidance. It’s hard to train for a 10k. It hurts. You try to do it yourself, you’ll find its quite difficult to do. If you have a coach, someone that can tell you that those shin splints you’re getting are not going to go away without rest, and “shake it off” is not going to work, then you’re far, far more likely to get where you need to be to run your 6 miles, get your loan.
[AN ASIDE: why did the $8000 tax credit make such a difference? Because the hardest thing for people to do is to save money. They cannot come up with a down payment. Inasmuch as there are only two kinds of 100% loans anymore - USDA Rural (currently out of money with 6 months left to go in the fiscal year) and VA - the $8000 credit allowed a lot of people to get a "gift" from mom and dad (or, let's face it, from Visa), put the cash down on the house, then use Uncle Sam's largesse to pay it back. PRESTO! 100% financing. That's gone now, and the pool of buyers is shrinking fast. It's like having a rabid dog chase you while you're running. Amazing what you can do in that circumstance. But it's a short-term thing, and it has negative consequences that show up later.]
Then there are the remainder, the 50% that really need to change radically. Those people will almost NEVER get there without help. They need radical credit surgery, a draconian budget, major lifestyle changes. Without a coach that really cares, and will take the time to design a program that they can stick to, then help them stick to it, they will not be able to qualify in six months to a year. They will not ever be able to qualify. That’s HALF of the population.
You want to know where the borrowers are? They’re stuck in their homes that they wish they could sell. They’re unable to qualify for loans.
So woe is me, all of us in real estate are doomed. Or are we? I have outlined the problem. There is a solution. Want to hear it? It’s really quite simple.
Unfortunately, I have to go do some mortgage work now. But during Mexico/South Africa tomorrow, I’ll post the answer.