Buyer's Remorse

For some reason, buyers have been pulling out of contracts more than they ever did in the past.  Most of us track business through signed contracts, figuring that the number of signed contracts that do not close stays relatively close to the same percentage year in and year out, so we don't feel that we have to adjust for sales that do not close, since they don't change year over year comparisons. For the past couple of years, however, that hasn't been the case--nationally, contracts that don't result in closed sales have doubled or tripled.  For a long time, we all thought that was the fault of banks and, through them, appraisers.

 While banks are always popular to blame for most things, it appears that there may be something else at work.  Even though we are now at a point in the real estate market where units are increasing and mortgage rates have started to rise, buyers still seem to feel that they have unlimited time and unlimited choice, so they dither.  Each time something new comes on the horizon, they go off to see it, even when they have already signed a contract for something else.  Instead of the principle of cognitive dissonance, which says that your mind will convince you that you've done the right thing when you make a choice and it is done, they now seem to deal with buyer's remorse by revisiting the choice again and again.  Is this a generational issue, since first-time homebuyers, who dominate the current market, have older relatives coming in and advising them before their purchases are finalized?  Or is this the result of a world where no one thinks that his or her decisions are final?  We'll find out when the economy improves more, since there won't be as much distraction with other choices drying up.  In the meantime, our advice to sellers is age old:  Don't count your chickens before they hatch.

Help from the Government?

President Obama has proposed some new rules that would allow homeowners to refinance in many cases where that has not been possible up until now.  The main hurdle has been the appraisal--often, homeowners who have the ability to pay have not been able to take advantage of lower rates, because their homes are "underwater" (worth less than the mortgage, or worth less than the amount that they could refinance for).  His proposal would allow homeowners who are current on their mortgages, and have been for the last six months, to refinance without an appraisal (it does say "in most cases", and I'm not sure what that means).  His stated goal is to lower people's monthly payments and free up the extra cash to circulate into the economy and improve sales of other goods and services.

I see two problems with this.  One is that such homeowners would be allowed to convert their loans, at their option, into 15-year mortgages.  Since such a move would raise, rather than lower, their payments, I fail to see where the extra cash goes into anything except a different loan.  Secondly, the idea that banks are being told to refinance without qualifying appraisals seems ironic.  Isn't that supposedly how we got into this recession in the first place?  So, we tell them to make loans that don't meet the criteria that we just tightened?  And, if those loans go bad, and we can't blame the banks and their greed, whom do we blame?

It's clearly frustrating for good credit risks to lose out on lower rates because they are paying their mortgages regularly, and I understand that.  Somehow, though, the whole program has the ring of having started with some White House staffer complaining about not being able to refi his/her house, and then letting policy people hash out a compromise so that the banks would be happy with the result.  It seems to me that we have done that too often already.

Mortgage Woes

There has been a lot of talk about how low mortgage rates are today--the lowest in memory--but much less talk about how hard they are to get approved.  We have found that buyers may wait for weeks with promises of commitment, only to be told after a long period of time that they are being denied.  The annoying part--actually, make that one annoying part--is that the denial is frequently for something that you would have thought that the bank had known all along.  This is true of delays as well.  We have had closings delayed multiple times, with some delays being for things that should have been settled well in advance. 

I suspect that some of the problem lies in confusion at the banks, and probably understaffing.  The bigger issue may be that no one has the authority to pull the trigger on anything, so things have to wend their way up a ladder of approvals.  Just to be clear, all of the blame does not belong with the banks.  Governmental changes in policy have caused all kinds of changes, and sometimes at the last minute.  The feds are always trying to protect us against the last problem, so many of the rules seem largely unnecessary.  This is one of the situations where we can groan when we hear that "we're from the government, and we're here to help you."

Buyers can contribute to the delays also.  Anyone who has gotten a loan in prior years may be amazed at how much information is demanded on today's applications.  Some people waste time trying to argue their way out of requirements.  Since most are imposed on the banks, as opposed to by the banks, this is a delay not worth taking.  The one I hear frequently is this:  "I don't need to get a loan.  I could pay cash.  If they just look at my bank balance, they won't ask for all this paperwork."  Not true.  Get over it, or go ahead and pay cash.

The statistics from the CT Multiple Listing Service show closing times of around 60 days.  That's not so far from the 30 to 45 days of the past, but should be noted, especially as almost 40% of sales are for cash these days, and therefore have no delays.  The time frames may get worse as we near the holiday season, so plan ahead to avoid disappointment. 

Financing Woes

There has been plenty of discussion about what's wrong with the real estate market. We've been through a few years where the focus was on what was wrong with the banks, and the government put in a lot of money to make sure that the problem got fixed. Somehow, the banks are now rolling along with big profits. It would be too much to say, however, that they are rolling along just as they did before. There are numerous new rules and regulations, intended to prevent the same thing that happened before from happening again. This time, though, it is the same taxpayers who paid the bill for the last fiasco who are being harmed. The banks are passing the consequences of those new rules along to the consumers. I'm not saying that this is necessarily wrong, but what's happening is that real estate is suffering, perhaps disproportionately, for what went on with the banks in 2008 and 2009. Where before people could, and did, finance 97% of the purchase price of a home (yes, that was the median financing amount in the boom years), now they have to put down 20% in many cases. So, of course, real estate sales have slowed.

The answer is not that we should all go back to financing the whole cost of a real estate purchase. However, our economy will clearly not recover until people have jobs and until real estate, which represents the biggest asset class most people own, bounces back to normal. Not where it was before, but to normal--that's all we're asking. In order for that to happen, we cannot spend all of our time trying to fix the last problem, and we may have to put in some money and effort to boost sales through this period. It's not enough for banks to make money again. The whole system is bogged down, and it has to be jump-started. Now.

Mortgage Rates are Going Up

Newspaper articles over the weekend made it clear what we already knew--mortgage rates are going up. Policies are changing, and banks can only make money by passing some of the charges along. As their ability to make money with fees is curtailed by governmental regulations, it's inevitable that the result will be higher rates.

Banks make money in at least three ways on mortgages. First, they collect fees when the loans are made. This is where the recent oversight by the Feds has led to restrictions on fees of every kind. Secondly, they make income from the servicing of loans; i.e., fees for handling the monthly payments. When a bank sells off loans in the secondary market, either to reduce risk or to preserve capital, it loses those servicing fees. Lastly, they make money from interest on the loan itself. If the first two sources of funds are curtailed in some way, it stands to reason that the banks would need to raise interest rates.

Although we have read a great deal lately about Washington's displeasure with banks and bankers, it does't seem reasonable to expect them to make loans that don't make a profit. After all, they are for-profit entities (and we want them to be, since we don't want to have to keep bailing them out!). In addition, someone has to pay for all the oversight being done; it takes time and employees to answer all the questions and fill out all the forms required by the government. There is a great deal more of that lately, and the costs of compliance have risen.

Therefore, we should all understand that money lost from one source of income must be made up for somewhere else. If we lower credit card rates and fees, or checking account fees, or late fees, something other fee or cost will have to go up. This time, it's mortgage rates.

Short Sales

Will there be more short sales in 2010, or will the market end the glut? I'm betting on the former, as there will still be many, many people who have negative equity in their homes. Our President, and the banks, are hoping that moral suasion will cause owners to continue to pay on mortgages that are underwater. The banks may not be thinking about the fact that they themselves have walked away from bad investments, and therefore it makes sense that homeowners and building owners might do the same. While there is still a degree of stigma in not honoring the debt, that's often weighed against extra money in one's pocket every month.

Now, not every owner is a candidate for a short sale, as banks do have the right to go after the extra amount from other assets. However, the government is leaning on them not to foreclose, which limits their options. Plus, they know that it costs about 15% of the value of a property to foreclose on it, and they don't want to lose more than necessary.

We have begun a joint venture with New Haven Asset Management to get those short sales approved and closed. One of the chief problems with doing one is that it can take up to a year, and buyers often won't, or can't, wait around until the lender or lenders agree. It makes a lot of sense to have somebody specialize in getting those approvals, and using them to make sure that the properties close. We have been doing that for a few months now, and the results are impressive. It's also common for lawyers to tell us, during a short sale handled by NHAM, that they plan to send future short sales to it, rather than reinventing the wheel themselves each time.

Every era in our country has led to new lines of business, and short sale management is one whose time has come. While we'd rather do business the old-fashioned way, where there is enough money to go around, the main thing is that we'd rather do business. Adaptation is often the key to success, and we're doing that.

Interest Rate Update

Now that the weather has moderated a little, we're starting to see some activity in the real estate market. One question on everyone's mind is the forecast for interest rates over the next few months. It's particularly true for those who are refinancing, since some banks allow you to take one "drop" between commitment and closing. Therefore, people want to know whether rates will go down more.

Of course, the correct answer is: Who knows? But I think most betting people feel that the governmental stimulus and drive to improve the economy will result in incentives of every kind that could possibly help the housing market. That would argue for lower rates to come. I don't think they'll be much lower, or for much longer, since banks are paying 5% for the TARP money. So how long can they really afford to loan it out at less than 5%?

So, if they are going to go down to 4 and 1/2, even for a little while, why not wait? The answer to that lies in the fine print. Fannie Mae, which drives a lot of bank lending policy, has quietly been raising the standards on loans. FICO credit scores to qualify for the best rates are rising, and higher rates are imposed when there is a higher loan-to-value ratio being sought. Translation: The rate might be slightly lower for some amount of time, but it will be harder for most people without excellent credit and enough cash for a substantial downpayment to qualify for that rate. When you take those factors into account, you will almost certainly come down on the side of buying or refinancing as soon as possible.

I should point out, in the nature of a disclaimer, that I do not have Obama's private Blackberry address, so these thoughts are my own, based upon reading public materials! And, given all that's going on, I'm sure there will be more news to follow.

OK, President Obama--Let's Get Moving!

I've been reading a lot about the TARP program (giving capital to banks so that they'll lend it out). One commentator today in the Times was saying that the banks aren't using the money to lend any extra; they're just holding onto it in case they have losses and need to boost their capital ratio. As Homer Simpson would say, "Doh!". If you give me some money to buy a present for myself, and, at the same time, warn me that I may have unexpected expenses over the next year, would you be surprised if I didn't spend it?

I think it's time to bring back the "bad bank" concept, used successfully in the late 80s and early 90s with the Resolution Trust Company, and even used in the Great Depression, as the Homeowners' Assistance Corporation. If the government took the rest of the TARP money and "bought", for some number of cents on the dollar, bad assets of the banks, then investors wouldn't be so skittish about investing in banks, stock prices and confidence would go up, and credit might start to flow a little faster. If you remember, those entities came out fine in the end; it just took some number of years to dispose of the troubled assets. We may not even be talking about a permanent loss, just a fix for the peace of mind of bankers and stockholders.

While we're waiting for something to happen, why not see some theater? We saw the world premiere of Athol Fugard's new play at Long Wharf Theatre this week. Coming Home is a beautifully acted, beautifully directed production. Although it's sad, it tugs at the heartstrings in unexpected ways. This makes two stellar premieres in a row for LWT, following the unforgettable Civil War Christmas, by Paula Vogel. I may not be objective on LWT, but I certainly am in the majority on these two shows. Treat yourself--see something warm on a cold night!