• Home values are roughly at 2001 to 2003 levels (pre-bubble).

• Home sales are at record low levels in spite of the fact that inventory remains high, prices are low, and mortgage interest rates are also at record low levels. Ordinarily, you would expect this to bring home buyers out of the woodwork to take advantage of these classic Buyers Market conditions, but that hasn't happened. That's because consumers are worried about their jobs, their finances, the economy, and the possibility that home values have not yet hit bottom. No one wants to own a declining asset.

• One third of all the home sales in the second quarter of this year were distressed properties (foreclosures and short sales), according to RealtyTrac. Those homes sold for an average of 32% less than comparable non-distressed properties. Even though the percentage of total sales that were distressed properties rose, the actual number of distressed property sales fell, because the number of non-distressed sales declined even more. That's because Potential Sellers are afraid to put their homes on the market because they will lose too much equity. This results in far fewer move-up buyers. The housing market today consists essentially of first-time buyers and investors, and many of the people who would ordinarily be first-time homebuyers have decided to rent instead, for the reasons I stated in the preceding paragraph.

• And, as if all of that were not bad enough, we are still looking at an enormous "shadow inventory" of delinquent mortgages, estimated at between 4 to 5 million homes – a huge backlog of inventory that hasn't even hit the market yet. At the rate that homes are being sold today, this would add more than a year's supply to our already bloated national housing inventory.

In fact there is some pretty fascinating brain research which shows that when a person with empathy sees someone going through an experience -- any kind of experience, ranging from joy to sorrow to rage or to fear -- when a person with empathy sees someone going through an emotional experience of any kind, the empathetic person can actually feel the same feelings as the person they are watching, and what is particularly fascinating is that the neurons in the same part of the brain will become active. In other words, if I have empathy and I see you experiencing sadness, and if we are both being monitored by a CAT scan, the parts of your brain that are connected with the experience of sadness will light up, and the exact same parts of my brain will also light up.

First, though, I want to say something about the purchase market today. If you have been around for a while and have been paying attention, or if you have studied the history of our real estate and mortgage markets over the last 40 or 50 years, when you look at the market we have today, there is one inescapable conclusion: this is an unbelievably good market for buyers. We have well over a year's worth of inventory nationwide. We probably have at least another year's worth of hidden inventory that has not yet hit the market. House prices have still not recovered from the burst of the housing bubble, and the median home price is roughly equivalent to what it was in 2000 -- more than 10 years ago. We have the lowest interest rates in history -- somewhere around 4.25% as I write this. I don't have to tell you what that means to the affordability of a mortgage payment. Yes, underwriting is tougher than it was in the "glory days" when a part-time cab driver could claim to be making $200,000 a year and nobody bothered to check. But if home buyers can document their income, and they have some savings, and if they have decent credit, and don't have unreasonable amounts of debt, it really is not that difficult to obtain mortgage financing.

That's a simple question with perhaps a not so simple answer, but the short answer is that many people who would otherwise be home buyers in this market are hesitating because of what they’ve heard or read in the media. Most Americans do not have an in-depth understanding of economics or the workings of the banking and real estate industries -- so when they read some of the media coverage of the credit crisis and the bursting of the housing bubble, they are confused about what to make of this information. Discretion being the better part of valor, many people elect to wait to take any action until the picture becomes clearer. (And sadly, by then the market will have turned and they will be paying a lot more for their homes.)

The title on the cover says, "Rethinking Home Ownership -- Why Owning a Home May No Longer Make Economic Sense". To get an idea of the impact of this issue of Time magazine on your prospects, consider the fact that for every person who bought the magazine and read the cover story, there were probably 10 people who saw the cover and didn't read the article, but did form an impression based on the title on the cover.

“Homeownership contributed to the hollowing out of cities and kept renters out of the best neighborhoods. It fed America's overuse of energy and oil. It made it more difficult for those who had lost a job to find another. Perhaps worst of all, it helped us become casually self-deceiving: by telling ourselves that homeownership was a pathway to wealth and stable communities and better test scores, we avoided dealing with these formidable issues head-on.”

Homeownership contributed to the hollowing out of cities? To the degree to which some cities in this country have been "hollowed out", that is an indictment of the declining quality of life in some cities, and homeownership (the reporter is referring to the so-called “flight to the suburbs”) is nothing more than a remedy chosen by free people in a free country. If more people wanted to live in cities, they would.

Homeownership kept renters out of the best neighborhoods? The reporter is referring to the fact that citizens in a community will sometimes unite to influence zoning laws to prevent the building of large apartment complexes in the middle of their neighborhoods. Their intent is not to discriminate against renters, but rather to protect their property values, and they take this position because there is ample historical and economic experience to demonstrate that when you put an apartment complex in the middle of a development of single-family homes, property values are in fact negatively affected. Time magazine and its reporter may not like the fact that in a free country people have the right to protect the value of their property, but that doesn't make it any less true.

Homeownership fed America's overuse of energy and oil? This assertion is based on the theory that if you live in the suburbs (the article ignores the fact that millions of homeowners live in cities), you probably drive a car to work. And for many people, that would be true, although many suburban dwellers work from their homes, and many more use commuter trains and other public transportation. The claim that America overuses energy and oil is made as if this were a proven fact that everyone knows. The truth is that it is a claim, an assertion which has been made for years by people with a particular political agenda, and this claim has been vigorously opposed by scientists with hard data. I’m not going to debate energy policy here, but anyone who is even modestly informed on the subject understands that it is not a settled question. And who decides that we are using "too much energy"? Time magazine? More people would agree that we are too dependent on foreign sources of energy – without necessarily agreeing that our need for energy is itself excessive.

Homeownership made it more difficult for those who have lost a job to find another? Here, the reporter is attempting to make a case that when you buy a home, you end up getting stuck there and can't move. So if you lose your job, and can't find another job where you live, you don't have the option of moving somewhere else where there may be a job. As evidence for her assertion, the reporter found one couple in Maryland where the husband was out of work and was offered a job in San Diego. They tried to sell their home in the immediate aftermath of the burst of the housing bubble and were unable to sell it for more than they owed on their mortgage. Against the impressive rhetorical power of our intrepid reporter’s single example, my response is a simple statistic: in 2009, which was by no one's lights a good year to sell your home, over 5 million people did just that. And unless Time magazine's reporter can show photographic evidence of these 5 million families handcuffed to the front doors of their former homes, one assumes that once they had successfully sold their home, these people were able to pick up and move pretty much anywhere they wanted to. To be fair to Time magazine, it has certainly been more difficult in the last three years for people to quickly sell their homes for a profit. But one would think from reading the Time magazine article that the history of homeownership began in 2007 and ended in 2010. That is just silly. It shows an ignorance of economics that is simply mind boggling. The housing market is, after all, a market -- and that means that it is cyclical -- there will be good times, bad times, and "normal" times.

Perhaps worst of all, Homeownership helped us become casually self-deceiving: by telling ourselves that homeownership was a pathway to wealth and stable communities and better test scores, we avoided dealing with these formidable issues head-on? Until I read this Time magazine article, I had not realized that simply by owning homes, you and I are responsible for the decay of our cities, for making renters into second-class citizens for destroying the planet, for exacerbating the unemployment problem, and apparently now, we are all deceiving ourselves, and by owning a home we are apparently participating in some kind of get-rich-quick scheme.

• The benefits to homeowners being described here represent a long-standing government policy to encourage homeownership -- not because the government is being charitable, but because it wants to encourage the economic and social benefits that accrue to the nation as a whole as a result of homeownership. In fact, the Time magazine article itself describes those economic and social benefits at the beginning of the article (although the reporter disputes those benefits without providing evidence).
• The vast majority of the 50% of our population that actually pays income taxes happen to be homeowners as well. Because of the way the tax code has evolved over the years, most renters do not pay income tax, and the poorest of them actually receive benefits paid for by tax dollars. (The exception would be renters who can afford to own a home but have chosen for reasons of their own not to do so. That is, of course, their choice. If they believed the tax benefits of homeownership were so “lavish,” they would go out and buy a home.)
• Certainly an intelligent case could be made for eliminating the tax benefits of homeownership as a matter of public policy. Such a case, it seems to me, would also need to advocate the elimination of ALL deductions and tax benefits provided by the government to encourage certain types of behavior. And if that were done, all Americans would be paying income tax -- not just 50% of us.
• But the biggest problem I have with Time magazine's position on the tax benefits granted to homeowners is this: it assumes that the "$80 billion in lost revenue in 2009" was money that belongs to the government. That money does not, and never did belong to the government. The government creates no wealth. The government has no money of its own. The only way the government can acquire money is by taxing its people and requiring them to pay money out of their own pockets to the government under threat of legal force. This attitude on the part of Time magazine that the government "gives" money to homeowners should frankly offend any American who has read the Declaration of Independence: “We hold these Truths to be self-evident, that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the Pursuit of Happiness--That to secure these Rights, Governments are instituted among Men, deriving their just Powers from the Consent of the Governed.” The position being taken here by Time magazine is more consistent with this famous quotation: "From each according to his ability, to each according to his need." – written by Karl Marx, the author of The Communist Manifesto.

You've probably heard the old expression, "there's no such thing as bad publicity." That may be true in some situations, but if you are trying to sell a home, or if you are a real estate agent, a mortgage professional, or anyone else who works in the real estate industry, you have to wonder whether anyone could find a silver lining in the kind of media attention exemplified by this Time magazine cover story that I've just described.

Of course, homeownership is not for everyone. We have all encountered people who are not yet in a financial position where it would be advisable for them to buy a home even if they could qualify for one. Moreover, home ownership is a personal choice and a lifestyle that does not appeal to everyone. If you prefer to rent you should continue to rent -- it is, after all, a free country. But there are hundreds of thousands -- perhaps millions -- of Americans who are in a position to take advantage of this remarkable perfect storm of conditions that strongly favor the home buyer. And they are holding back, waiting, afraid to move forward -- in part, because of a misinformed and economically illiterate media elite that appears bent on convincing all of us that the sky is falling and that even if we did ignore their warnings and get a great bargain on a home, we should be branded as selfish people who are bankrupting the country, ruining our cities, and destroying the planet. Somebody needs to have their meds checked.

In my seminars, I have spoken about the concept of "the Smart Money". This is a borrowed Wall Street expression that refers to the behavior of traders who consistently outperform the market. How do they do that? By doing the exact opposite of what everybody else is doing. In the real estate market today, the "herd" is staying away in droves – in large part because they've been scared off by all the gloom and doom publicity. Right now, as we speak, the smart money -- whether you’re talking about an experienced investor or a first time home buyer -- is buying real estate.

One reason you are in a unique position to do this is that the general public tends to perceive mortgage lenders as being more neutral about whether or not a particular consumer decides to buy a home. People have that perception of you, in part, because they know they will have to meet certain qualifications before you would loan them the money to buy a house. Contrast your position with that of a real estate agent: nobody seriously believes that a real estate agent would ever say “No” to a potential home buyer -- so when  Realtors tell them that this is a great time to buy a home, people see that as a self- serving statement from a professional salesperson. (You may remember, they were saying the same thing in 2005, just before the bubble burst and a lot of people were overpaying for houses that were about to lose 30% of their value.) Your perceived neutrality, on the other hand, gives you the potential for greater credibility.

You see, you cannot overcome people's fears by ignoring them. You have to help your clients articulate and face their fears with facts and eyes wide open. I happen to be convinced that today's market is an unprecedented opportunity for people who want to own a home. I am also convinced that there are pitfalls which must be avoided -- it is entirely possible for an uninformed buyer to make some very expensive mistakes in today's real estate market. So as your client's trusted financial advisor, you owe them a balanced analysis that allows them to fully understand both the risks and the rewards of buying a home in this market.

Thursday, July 3, 2008

I want to summarize some recent market information for you on delinquency & foreclosure rates, REO properties, and news of a recent uptick in existing home sales. Then I will provide some practical analysis from a sales and marketing perspective, to give you some concrete things you can do to use this information to improve your strategic position in your local market and originate more loans. 

REO Properties Account for about 14% of Inventory of Existing Homes for Sale; Banks Are Becoming More Aggressive in Lowering Prices for Quicker Sale

For more information on positioning yourself as a Homebuyer’s Coach, watch my new online seminar, How to Succeed in This Terrible, Awful, No-Good Lousy Market, and read The Difference Between Hype and Performance.

And if you want some help getting started with this new approach to doing business in today's Buyer's Market, read below to see how you can get a free, personal coaching session: