The Housing Market in a Word: Distressed
According to the most recent S&P/Case-Shiller Home Price Index, home prices dropped nationally 5.9 percent for the first six months of this year and foreclosures and short sales remain at historically high levels. The Lansing area dropped 6 percent.
In this uncertain environment everyone is distressed. Buyers worry that they are paying too much for property. Sellers worry that if they sell their home it may not be worth what is owed which might force a short sale, require bringing cash to closing, or even a foreclosure. Banks are distressed because of high default rates and a glut of foreclosed properties they own: homes that sell for 60 percent of current value. Appraisers are distressed because of a shortage of good comparables and pressure from lenders for aggressively low appraisals. Real estate brokers are distressed because even though unit sales are rising their income is based upon dollar volume and lower average prices mean lower income. Finally REALTORS® are distressed because they must deal with the stress of their clients, difficult lenders and low appraisals. There is plenty of stress to go around.
What can be done to address all this stress? The housing market must stabilize and begin recovery. Without a recovery in the housing market the economy can’t recover and the stress we are experiencing will continue. The White House has not demonstrated the political will to address the systemic issues, instead hoping the market will fix itself, and our political divide has paralyzed lawmakers.
There are potential solutions, however, if we choose to act. Fannie Mae and Freddie Mac guarantee around five million loans where borrowers owe more than the current value of the property. A way must be provided for these loans to be refinanced. The White House rolled out a program two years ago to assist, which has been phenomenally unsuccessful, helping just 57,000 borrowers. Many borrowers who are current on their loan payments, but are without sufficient equity to refinance, need a way to qualify. Rule changes at lenders and at Fannie and Freddie would be required and a key facet is principal reductions to credit worthy borrowers. To say this would be unpopular with lenders and bondholders would be an understatement. However, the benefits to this type of refinance effort are many. Fannie and Freddie would benefit by much lower default rates and fewer properties moving to foreclosure. The housing market benefits from a stemmed flow of distressed property which will allow housing values to firm. The economy benefits when monthly mortgage savings get spent in other ways.
The glut of foreclosed properties is depressing all home values and threatening the livability of entire neighborhoods. This inventory must be reduced. Real estate investors play an important role in the purchase and rehab of foreclosed properties. Lending standards for investors could be relaxed to allow those buyers to sponge up excess foreclosed inventory and accelerate the rehabilitation of markets and neighborhoods.
In order to reduce the flow of foreclosures, lenders’ short sale procedures need to be rationalized. Currently sellers and agents get caught up in a morass of painfully slow moving steps displaying no common sense at all. Lenders should figure this out since short sale properties sell at 79 percent of current value versus the 60 percent for foreclosures.
None of these actions is easy or without risk and the current policy views of the Federal Housing Agency would need to be changed, but the only solutions skeptics propose are muddling through and hoping for improvement in the economy. They say curing our economic woes will cure our housing woes. I think the opposite is true.
Now is the time for real leadership and action. President Obama recently acknowledged the obvious. The federal government has not done enough. What it has done hasn’t worked well, and he is willing to accept that it might take a year or two before housing recovery begins. This capitulation and hoping for the best is not a strategy. I guess I’m distressed as well.
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Debbie Barnett is the president and owner of Tomie Raines, Inc. The company was founded in 1977 and Barnett has owned the company since 2002. She began her real estate career in 1985 after attending Michigan State University and was an award-winning agent with two other local firms before joining Tomie Raines, Inc. in 1995. Barnett also owns TRI Title Agency and Tomie Raines Home Warranty Company.