Whistling Past the Mortgage Graveyard
How Loan Originators Can Take a Reality-Based Strategic Approach to the Next 12 Months
What is “whistling past the graveyard”? According to Wiktionary, it’s an idiomatic American expression, meaning: To attempt to stay cheerful in a dire situation; To proceed with a task, ignoring an upcoming hazard, hoping for a good outcome.
All of us who make our living in the mortgage industry want the housing market and the economy to recover. The fact that loan volume has shrunk from $3 trillion in 2005 to a projected $1 trillion this year is reason enough for that desire.
But it’s one thing to hope for the best while keeping our feet grounded in reality, and another thing to believe the worst is over when the facts say something quite different. Case in point:
According to the National Association of Realtors®, contract activity for pending home sales has risen for six straight months, which some point to a sure sign the housing market is in recovery.
Lawrence Yun, NAR chief economist, says the housing market momentum has clearly turned for the better. “The recovery is broad-based across many parts of the country. Housing affordability has been at record highs this year with the added stimulus of a first-time buyer tax credit,” he said.
Mr. Yun’s job as the chief economist for the NAR is to present the rosiest possible scenario in order to encourage the public to buy and sell homes. If you look back at his analyses and predictions over the past 4 years, you would have to give him credit for taking his job very seriously.
Unfortunately, he has been consistently wrong, claiming at first that the housing bubble was just a short-term anomaly, and then retreating for the last couple of years to the position that the proverbial “Spring” was just around the corner. Now he’s saying the market has recovered, when in actuality, the picture is not nearly that pretty. If you look more closely at the numbers, the Pending Home Sales Index in the Northeast and the Midwest regions of the country actually declined in July. The numbers only improved in the South (up 3.1 percent, and in the West (up 12.1 percent). The big jump in pending sales in the West basically carried the country’s numbers. And what’s going on in the West? The last time I saw numbers for California, for example, the vast majority -- more than 80% -- of all residential real estate sales were foreclosure auctions, REO sales, and short sales.
A nationwide survey of 1,500 real-estate agents, conducted in June and sponsored by the trade publication Inside Mortgage Finance found that only 36% of all sales involve "non-distressed" properties.
Of the non-distressed sales, only 31% of those were what the survey described as "unforced or optional." The rest were sales by homeowners in some kind of financial or personal crisis.
Let’s do the math and see what those numbers are telling us. Assume a hypothetical market with 1,000 home sales, for the sake of simplicity. 640 of those sales were “distressed sales”: foreclosures, REOs, and short sales. That leaves 360 homes that were “non-distressed".
But hold on a minute. The survey indicates that of those 360 home sales, 248 were sales by homeowners “in some kind of financial or personal crisis.” So of the 1,000 sales in our hypothetical housing market, 888 of them were made under some kind of duress.
The Wall St. Journal (Improving Home Sales Belie Market Reality, August 21, 2009) quoted John Mauldin of Millennium Wave Advisors, who wrote, in response to this survey: "Think about that for a minute. Two-thirds of home sales are either foreclosures or banks taking a loss on the mortgage. And only a third of the remaining one-third -- roughly 10% of overall sales -- comes from something we could call a ‘normal selling process’."
There is no question that the government’s taxpayer funded first-time buyer credit has stimulated sales to people who are in a position to buy, and who have been motivated to buy now because of the November 30th deadline. The NAR expects a flurry of sales in the next few months, and they’re probably right about that. One real estate agent in California called it a “feeding frenzy at the lower end of the market”.
The same thing happened with the “Cash for Clunkers” program. When you create a financial incentive to buy now, and an artificial deadline, anybody who eventually would have bought will buy before the deadline. The car dealers will have a good third quarter thanks to “Cash for Clunkers”. But they now realize that their next two quarters are likely to be disasters of historical proportions.
The Mortgage Bankers Association reported a couple of weeks ago that the number of homeowners behind on their mortgage payments hit a new high during the second quarter, with more than one in eight homeowners (13.2%) either delinquent or in the foreclosure process. And Jay Brinkmann, chief economist at the MBA, said foreclosures weren't expected to peak until later in 2010.
So housing inventories are likely to continue to be fattened by foreclosure auctions and REO properties being dumped on the market, and continuing to compete with normal sellers trying to market their homes, and putting further downward pressure on home prices.
In July of 2008, sales of existing homes hit a five-month high, leading the NAR to openly hope a sustained upturn was coming.
They were wrong. Today, home sales are pretty much where they were last year. Given the level of consumer confidence (low) and the rise in unemployment and foreclosures, they will likely still be at this point this time next year.
What Should Your Loan Origination Strategy Be for the Next 12 Months?
In most markets across the country, expect the action to continue to be in distressed properties. Expect the buyers of those properties to be investors and first-time buyers who recognize that this is a unique opportunity to buy homes today at bargain prices – homes that will return to more normal values when the housing market eventually regains its equilibrium – thus creating “instant” equity once that happens.
If you’re in a market that has not been as heavily impacted by foreclosures and the like, you may see less investor activity, and a higher proportion of first-time buyers. You can also look for move-up buyers who see an opportunity to sell their home, and make a very good deal, relatively speaking, on a property in a higher price range. These move-up buyers will understand that the sale of their current home and the purchase of their subsequent home should be viewed as a unified strategy. In other words, they will understand that they can’t expect, in this market, to get top dollar on the home they’re selling, but that they can more than make up for what they may be losing on that sale when they buy their next home – because, as a buyer in a market segment with lots of inventory and not many buyers, they will be in a very strong negotiating position, with lots to choose from and little competition from other buyers.
Assuming you don’t already know, how do you find out which description best fits your market dynamics?
· Interview real estate agents. Do you need an excuse to talk to more agents? Are you looking for a way to get into substantive conversations that don’t begin and end with, “Please, sir, do you have a deal for me?” Then talk to agents every week, and ask them about their listings, about any recent sales. Find out whether they were “normal” transactions (a totally willing but not desperate seller and a buyer willing to pay something close to asking price), or whether they were distressed in some way. Ask them how many REO properties they would guess are on the market in your area, and whether those REOs are even publicly listed in the MLS. The more agents you talk to, the better feel you’ll get for where your market is.
· Go to open houses and broker opens. Get familiar with the inventory in your market, and while you’re at it, interview the agents you meet (see the previous bullet-point).
· Find a knowledgeable and experienced agent in your area and ask him or her to share with you the monthly MLS statistics on total listings, and the total number of sales in the last month, as well as the average or median price the homes sold for. Start keeping track of this data. It’s like an EKG of the health of your local market. Divide the total number of units sold last month by the current number of listings for sale. As a rule of thumb, if that ratio is higher than 30%, your market is probably relatively healthy – it suggests that most of the people who want to sell their homes are able to do so in about 90 days. If the percentage of available listings sold each month is 30% or less, that indicates a strong buyer’s market, and the lower the percentage, the stronger the buyer’s negotiating advantage and the greater the downward pressure on prices and values.
· It also wouldn’t hurt to get your real estate license and join your local Board of Realtors so you can have direct access to the MLS and its reports on your real estate market.
If you’re familiar with my work, you know I’ve been on a one-man mission for years to help loan originators become more knowledgeable about their local real estate markets, and to position themselves as homebuyer coaches who teach their buyer clients how to benefit from the unique dynamics of this housing market.
If you can reposition yourself in that way, you will have an insurmountable advantage over your competition, because you will be able to prove to your prospects that you save your clients far more money on the purchase (and the financing) of a home than any other lender. You will easily double your current rate of lead conversion (which means you’ll close more loans even if you don’t generate more leads).
Your buyers will be more confident and decisive, which means that when you refer them to one of your Realtor partners, they will have more realistic expectations about what they want and will be more self-assured about making offers – resulting in a quicker transaction for the Realtor than if the buyers had simply gotten prequalified or preapproved with another lender. The shorter selling cycle for your agents means they will be able to work with more buyers and close more transactions.
If you can see how this strategy could help you find and close more purchase transactions in today’s market, then you’ll want to be in my new, free online seminar on Tuesday, September 22nd:
FREE RECORDED SEMINAR
How to Close More Purchase Business
In Today’s Market
The latest data indicates that two-thirds of all purchase transactions are Foreclosures, REO sales, and Short Sales. And only about 10% of overall home sales are coming from what we could call a normal selling process.
The National Association of Realtors reports that contract activity for pending home sales has risen for 6 straight months.
Who is buying these homes? And how can you successfully market to them?
That’s the subject of my online seminar, How to Close More Purchase Business in Today’s Market. In this free webinar, you will learn:
· How to identify and reach the people who are buying homes today
· What do these people really want that you can provide, and your competitors aren’t providing?
· A Unique Selling Proposition that will immediately capture your prospects’ attention and give you a higher conversion rate than anything else you’ve ever tried
· How to communicate with real estate agents so that they are asking to work with you
How to Close More Purchase Transactions in Today’s Market
· Generate purchase leads that are fundable in today’s marketplace
· Position yourself with homebuyers using a USP that puts you head & shoulders above your competition
· Develop profitable relationships with real estate agents
To Receive a video recording of this seminar: Complete the form below
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