Today marks the end of the Homebuyer Tax Credit for people who still want to take advantage of the stimulus money that the government felt would cure a wounded housing market. Nobody can argue that the stimulus did not stimulate, but it certainly did not fix the heart of the problem. It seems as if we need to get a few "numbers people" involved in this solution.
Housing Market Needs To Stimulate Move Up Home Buyers
For the sake of simplicity in this article, we will break potential buyers into two distinct groups. First time homebuyers (they do not currently own a home) and move-up buyers (they currently own a home and could include down-sizing buyers).
It appears that nearly 100% of the effort in the housing stimulus program has been designed to attract the first time home buyer. It was a smart move to get things rolling, but apparently no real plan has come together for maintaining the momentum that has been created by these programs. After all, we have seen the first time homebuyers percentage of the market skyrocket, so it's not like this source can go on forever.
Ultimately, we need to consider how to motivate the move-up buyer. Historically, this is accomplished with a healthy economy and increased earnings. Unfortunately, there is another major factor in motivating this move-up buyer that historically exists but is not available in today's housing market.
Move Up Home Buyers Have No Down Payment
Historically, the majority of move-up buyers had a healthy amount of equity in their homes and they were able to capture that equity when they sold their house, and they used it for their down payment.
I have seen reports that showed that while over 80% of first time homebuyers used "low money down" loan programs, more than 60% of move-up home buyers put 20% or more down on the purchase of their home.
The falling real estate values have taken away this top source of down payment funds for the move-up home buyer. I believe we are going to see a stall in the recovery of the housing market, as people who want to move will not be able to move.
They might be able to sell their homes, but they will not be able to find financing for the home that they wish to buy. The equity that they would normally have in their home is gone, and unless we develop a plan to resolve this issue, the housing market has a very long recovery in store for its future.
How To Fix The Housing Market
So it seems to me that the mess that our real estate market has created looks like this:
- Loan programs were created that required no real buyer commitment. This created a boom in the real estate market and thus a rush to create more supply. By "creating" more demand by qualifying suspect buyers, higher supply levels were absorbed.
- Loan defaults by high-risk borrowers and the subsequent termination of the high-risk lending practices slashed demand and supply began to mount. Demand dropped so greatly that the federal government stepped in to stimulate the market with a housing tax credit. The "first time" homebuyer was targeted as a way to expand the buyer pool (demand) and to hopefully reduce supply.
- The current crop of first-time homebuyers has been creamed. Even if the tax stimulus was extended, it would not fix our problem (think of law of diminishing returns). The fact is we need to solve the down-payment issue in the mortgage markets.
- In order to "bridge" from the current situation to a normalized housing market, we have to create loan products that do not put the lender at unacceptable risks, but give the move-up home buyer the ability to buy a new home.
We Must Return Healthy Risk To Mortgage Markets
When the mortgage markets busted, we executed a typical market reaction and over-corrected the problem. We went from "anybody who can fog a mirror" loan programs to an "only people who could pay cash for the house" mentality. What we really need to do is to resort to traditional shared risk loan programs.
We need to resurrect the "combined loan to value" of 100% if we want to see the market recover. Down payments are gone, so if we continue with overly restrictive loan products, then we will not see the housing market return for 15 to 20 years, as repayment of loans will have to outpace depreciation. With falling values, investors will flee the market as well, thus putting more pressure on prices. But there is a safe and smart solution.
We Need A High CLTV Loan Product For The Masses
Remember, the mortgage market busted because lenders were being careless. They lent 100% to people buying homes, and many of these people chose to "walk" when times got tough. While 100% has always been available, it was only during the boom that single loan products were created to fund the 100%. This put all the risk on the lender, and this type of practice will not help return the market.
But there are traditionally sound ways to provide 100% financing for home buyers. First mortgage lenders need to curtail their risks by reducing first position loans to levels where they feel they are safe. Traditionally, this level has been at 80% LTV, but with the state of the market, I would think 70% LTV would be a wiser move.
The 2nd mortgage(s) that will provide the remainder of the acquisition amount will need to come from home owners and high-risk investors. These are not easy to come by, and historically rates were very high to motivate investors into the game. This made the programs available to those who had no money to put down, but had the credit history that demonstrated that they would make the loan payments.
100% CLTV (combined loan to value) loan programs are needed to continue the recovery in the housing market. The coming stall in the housing market could have been avoided had these programs already been in place, but it is never to late to start fixing the problem.
As the economy continues to improve, people will want to be able to make a move. All we need is for the primary lenders to allow the down payment to come in the form of a second mortgage, either from the seller of the home, or from another investor. The seller of a property will share in the risk of the buyer, but the new first mortgage lender will have significantly reduced risk and thus a healthy mortgage loan.
Technorati Calls Tallahassee The Best
On another note, did you see we moved to #1? Technorati (the web site that evaluates over 113 Million Blogs on the Internet) has named the Tallahassee Real Estate Blog it's top blog in the real estate category!
Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.