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Every day it becomes more and more clear that the housing market will not be able to recover without a transitional plan from the home mortgage industry. All of those dollars spent to stimulate the market will go to waste if we do not fix the underlying problem that has halted demand for residential real estate.
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On April 30th of this year, I wrote the blog post titled Housing Market Needs New Type Of Fix, regarding the need for a transitional plan from the home mortgage industry’s crazy days of imprudent lending during the boom to a more sound and rational plan to lend based upon established value and credit standards. The post was very well received and through this morning has been viewed more than 21,150 times.
The basic premise of the article was that the mortgage markets had over-corrected so rapidly that very few potential buyers would be able to qualify for a loan. The article stated a need for the re-introduction of a “healthy” degree of risk to the mortgage markets with the resumption of no-equity loans for a period of time.
The biggest problem that we are facing in the housing market is that the majority of prospective home buyers first have a home to sell. The equity they once had in their homes is gone, and thus the source for their next down payment is gone. This means that the largest pool of prospective buyers is trapped and cannot come to the market. This is a log-jam that will take many years to unravel without the availability of reduced equity lending from the home mortgage industry.
I believe the market is going to continue to slow, and I believe values will be under the greatest attack that we have seen since the great depression. The government will again be called upon to “rescue” the housing market and I hope they do not just throw money at the problem.
Rather, a smart solution would be to ensure a loan program that would be very similar to the VA loan, where the government guarantees a portion of a “no money down” program offered by the home mortgage industry. Even if the program has a high rate of default, it will be less costly than just giving away money to home buyers.
Without such assistance, I am concerned that it will take many years before we put this behind us. Already, we know that it will take population growth to create real demand for housing, but even with the increased demand, it will take changes in the home mortgage industry to facilitate this new demand.
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{ 2 comments… read them below or add one }
Joe,
There is definitely more change coming to the home mortgage industry. Unfortunately, it is not the type of change that will help the real estate market. The change in FHA loans of reducing the Up Front MI and increasing the monthly MI will result in $10,000 less purchasing power on a $250,000 house. The change for USDA to keep it from running out of funds yearly will cost borrowers about $3,500 in borrowing power on a similar $250,000 house. Granted both of these are excellent programs.
There are not a lot of alternative programs available out there. The pendulum has swung too far into the correction and tightening way. At some point, maybe now, it becomes a self fulfilling prophecy, because the banks cannot sell their inventory of foreclosed homes thus further driving prices down and leading to increased underwriting standards, ad infinitum.
Fannie is pilot testing a $1000 down program in a few markets. Just depends upon wide acceptance by the lending community and pushing out to other markets.
Also, Private Mortgage Insurance companies, at some point need to step back into the game.
Great post.
Thanks Jeremiah. I agree. The fix for the problem is actually heading in the wrong direction.