Recovery? Signals to look for

Greetings,

We’re off to a pretty decent start this year:  lower prices, interested buyers, and very low interest rates are creating a dramatic difference in loan demand compared to last year.

Of course, the lending environment is more restrictive – so it’s important to get pre-qualified up front to uncover potential snags.

Down payments of less than 10% will be difficult, as mortgage insurance companies have categorized us as a “declining market” and adjusted guidelines accordingly (call me for further details – 305-294-1484).

However, this is where the FHA program comes in, allowing down payments as small as 3.5% on primary residence purchases (all of which can be a gift or loan from family member).

Remember, we are FHA APPROVED!

Interest rates on the benchmark 30-yr. fixed continue to be volatile.  Lows have touched into the upper 4% range, with trading primarily in the 5.0%-5.50% range since Christmas.

IMPORTANT:  There may be a short window of opportunity on the current low rate environment (Jan-June 2009).  The primary reason rates are this low is that the Treasury has begun their scheduled purchase of over $500 Billion in mortgage backed securities between now and June.  With the removal of this temporary stimulus, rates could easily creep back up over 6% when this buying period has ended.

There are also concerns over the expected inflation that the Obama administration’s economic package may cause in the long term – putting further upward pressure on rates later this year.

If we’re wishing for significantly lower rates (I certainly am), it may very well take further government subsidies to drive them lower.   This is yet to be seen and will likely be decided upon depending on how the economy seems to reacts to current measures.

Expectations for the economy in general and real estate in particular:

In my humble opinion, two things need to happen for a “recovery” to begin:

(I won’t begin to pretend to have the answer as to how to execute this – but nonetheless, it’s what needs to happen)

•1)      Bad assets (loans) need to be taken off the books of the banks  – whether via a government entity as originally planned for the TARP funds, or change in accounting rules (mark-to-market problem) – or any other intervention.  As long as the banks are carrying these bad loans, they will not relax credit restrictions.  The government can pump liquidity into them until their roofs pop off – they are going to invest the money rather than lend it out (primarily commercial lending here – because they’ll continue to make residential loans that meet fannie/freddie/fha guidelines – as there is a market to sell them).  They are going to hoard cash to protect against expected future losses from the existing loan portfolio and to help protect their ever dwindling capital positions.

•2)      Homeowners who are upside down on their homes (primary residences) need to be put back into an equitable position.   No one likes these bailout scenarios (myself included), but we are already there and need to put the money where it will do the most good (bottom-up approach as opposed to continuing to gift money to the bankers).  The foreclosures will not stop until this situation is directly addressed.  Interest rate reductions and other loan modifications are not going to do it.  People don’t care about having their monthly payments reduced if they are $200k upside down on their home and can’t see themselves ever recouping it.  They want OUT!  They’re going to continue to walk from these properties.

When you see these two things start to happen, you will know we are on the road to recovery.  Otherwise, we will continue to be stuck in the mud for quite a while.

But what do I know?  I’m not some egghead in Washington or some corporate titan using a $35k antique toilet.  I’m just a guy getting a daily look into the finances of everyday Americans.

Just keeping it real.

Feel free to call me if you want to discuss or just to tell me what an idiot I am (305-294-1484).

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