Posted by Tim Burrell - When I was younger, the spin of the Media made me angry.  Now, it makes me smile. There is an advantage to getting older, as you realize that sometimes journalists get an assignment to write a story on "How Bad is Real Estate" or "The Mortgage Meltdown".  If the reporter is told to write a story on the Mortgage Mess, the reporter has to find the facts that support that story.

 

I do not question that the housing and finance market statistics that are reported can be defended as accurate.  However, you have to understand that the choice of the statistics to use creates the spin that supports a particular conclusion.   Are there serious problems in the mortgage industry today?  Yes.  Are the supply and demand of the real estate market different from two years ago?  Definitely, in many areas it has shifted in favor of the buyers, in some others it has shifted in favor of the sellers.  Does the bad news about financing and real estate overwhelmingly outweigh the good news?  That depends on who is spinning the figures.  If you look at the media, it is doom and gloom.  If you look at the facts and figures, there is a lot of good news. 

 

The following information was researched by Tom and Louise Hranicka of the Outer Banks in North Carolina to try to give a sense of balance and perspective to the news reports.

 

The Mortgage Market

The primary topic in the mortgage industry reports is “sub-prime” loans.  Those loans have severe problems in a relatively few states.  Sub-prime Adjustable Rate Mortgages (ARMs) are at the core of the problem, as the payment can adjust to push a marginal borrower into a financial abyss.  Not all sub-prime loans were made to borrowers with poor credit.  In many resort areas, a substantial number of well-qualified applicants voluntarily chose sub-prime loans over traditional loans for a variety of reasons, primarily the ease and speed of getting the loan.  Here are the facts: 

 

  • Just over 13 percent of all mortgages are classified as sub-prime by the Mortgage Bankers Association.  About 11 percent of the sub-prime loans are more than 90 days delinquent or in the process of foreclosure.  Do a quick calculation and you will discover that nearly 89 percent of the sub-prime loans are paid on time or they are less than 90 days delinquent.  With some more calculations, you can report that the delinquent sub-prime loans are 1.43 percent of all loans.  Could you sell a newspaper with that figure?

 

  • In reviewing the mortgage market, the Mortgage Bankers Association just reported that the delinquency rate for all loans during the 3rd Quarter of this year was 5.59 percent. Loans that are in the process of foreclosure added another 1.69 percent for a total of 7.28 percent.  Phrased another way, 92.7 percent of all mortgage loans were not delinquent or in the process of foreclosure.  Is the glass 8% empty or 92% full?

 

  • Delinquency and foreclosure problems seem to be at their worst in states that had the highest levels of speculation during the boom years along with the states in the Midwest with significant unemployment. Florida, California, Michigan, Ohio, and Indiana are leading this trend.  North Carolina is a stong housing market, and the number of HUD foreclosures has decreased so dramatically in the Triangle Area that it is hard to find a HUD foreclosure property on the market in the Triangle.  Once again, all Real Estate is local, so the Triangle can be the opposite of a national trend.

 

  • The relative magnitude of the mortgage market issues also needs to be appreciated.  According to the Mortgage Bankers Association, “While subprime ARM delinquencies and foreclosures are climbing in all states, in most states the actual number of loans involved is fairly modest.  For example, the number of subprime ARM foreclosure starts in California during the third quarter equaled the starts in 35 other states combined.”  Even in California, the number of foreclosures in property along the coast is small. 

 

  • According to the U.S. Census Bureau’s 2005 housing survey, there were 74,931,000 occupied residential units in the country. One-third of these properties (24,776,000) were owned free and clear with no mortgage debt, so they have no chance of foreclosure and are not included in the statistics on loans in default.

 

  • For the second home market, a survey done this year by the National Association of Realtors estimated that 25 to 30 percent of vacation and investment properties were free and clear of any loan.  Again, these homes are worry free and not included in the statistics concerning foreclosures.

 

Financing Availability & Interest Rates

 

Lenders are making conventional loans to qualified buyers in the same manner that they always have, just with a little more review.  These loans, which are underwritten using traditional standards, are being made largely without any interruption.   In fact, the number of loan applications jumped in the last three weeks, as interest rates are so low.  The mortgage market has changed, and for conventional loans, it has only changed slightly.  Since nearly all of the homes in the Triangle are purchased using "conforming" loans that are under $417,000, the effect is slight.  So, our mortgage market has not shut down, and the changes that are occurring are generally positive in nature.

 

  • Even for conventional loans the underwriting process has become more detailed.

 

  • Borrowers with limited or no equity in their properties who are trying to refinance their adjustable rate mortgages are having difficulty finding new financing, but special programs for FHA are available to rescue some of these borrowers. 

 

  • Interest rates are some of the lowest in history, making monthly payments less so properties are more affordable if the buyers are smart enough to catch them before the rates go up. 

 

  • During the second week in January, the interest rate offered through a major lender for 30-year fixed rate conforming loans (loan amounts of $417,000 or less) was 5.75 percent with no points. A point equals one percent of the loan amount, and "no points" means this is one of the least expensive loans to originate.  If you give the lender some "points", the interest rate goes down.  The interest rate for jumbo loans (loan amounts in excess of $417,000) was 6.5 percent with the payment of one point.

 

I do not mean to imply that there are no problems in the mortgage and real estate industries.  Quite the opposite is true, yet the facts show that, for the most part, the situation is much more positive than what you see in the news.

 

As you watch T.V. or read the paper, keep a few things in mind.  First, real estate goes through cycles, and a house is a long-term investment.  The news reports focus on the latest short-term crisis.   Second, every real estate market is local.  While there can be no denying that events in the outside world have some effect on the Triangle market, our market is so different from the national real estate market that the majority of the homes for sale are actually experiencing a Sellers Market (where there is not enough supply to satisfy the demand).  Third, as today's proposed economic stimulus package illustrates, our government is not going to sit by and let a recession occur, particularly when elections are less than a year away.

 

By now, I think you can hear the story I am trying to tell.  As the old saying goes, no matter how thin you slice it, there are always two sides.   Particularly with "write the story with the conclusion in mind" journalism, it is difficult to see all sides of an issue.  But, if you do the research and look at the facts for your area, consult with an experienced Realtor who knows the local market, and don't blank out the positive aspects in what is otherwise being presented as a story written to come to a pessimistic conclusion, you will discover some amazing opportunities. 

 

You decide – is the glass 8% empty or 92% full?

 

I would love to hear your opinion, as I enjoy comments on my posts.