This week, Lifestyle Denver is here to give you some perspective on mortgage reality. The current crisis we find ourselves in has been bred of a complex and often mystifying set of circumstances. This isn’t just a “housing crisis,” it’s a crisis of the investment markets, of the value of the dollar and of derivative investments concocted to generate higher returns. In graduate school Finance 101, we learned about the “risk/reward ratio.” Well, those high-flying investment bankers developed seriously profitable yet highly risky mortgage bundles that they were buying and selling – all while the rest of us slept comfortably in our beds at night.
They reaped the rewards for a time, and now the chickens have come home to roost. The risk was just too great and the house of cards has fallen apart. The Federal Reserve is concerned about inflation, yet is lowering rates to help the housing slide. While that’s all good for real estate and mortgages, it also results in a devalued dollar and rising prices – there’s where inflation rears it’s ugly head after all. And we’re certainly not planning a trip to Europe this year.
There are currently $9.9 trillion dollars in mortgage loans in the United States, but only 13% of those are sub-prime mortgages. The media sells bad news, and while we can’t deny there has been plenty of it lately, I would argue that theirs is not a balanced perspective.
Why is the media giving the sub-prime “melt down” so much publicity? There were many Fortune 100 and 500 Companies that purchased financial instruments as assets that have sub-prime loans within the product. They did this because of the huge rates of return they gained over the past 6 or 7 years. Now, these companies are writing down their investments gone bad, forgetting the billions of dollars they made on sub prime loans over the last 6 years. The media outlets are focusing on the huge write-downs (and there will be more) and the unfortunate people who have lost their homes. How many people do you actually personally know who have lost their homes in the past 18 months? Not many, I’ll bet. That’s because most homeowners aren’t struggling with making their payments.
Other numbers to keep in mind
According to Henry Paulson, the National Treasury Secretary, while subprime mortgages make up only 13 percent of outstanding mortgages, about 50 percent of the foreclosures started in the third quarter 2007 were subprime loans. And more astonishing is the fact that, while subprime ARMs are only 6.5 percent of mortgages, they represent 40 percent of third-quarter 2007 foreclosure starts. The ARMs will reset again, once more driving up the monthly payments for many of the people holding these types of mortgages. However, given the fact that the bulk of homeowners either have a conventional mortgage or have their home paid off, this will eventually shake out.
The National Association of Realtors published similar numbers in their February “Real Estate Insights“:
As of the third quarter 2007, prime mortgages accounted for 78 percent of the total loans serviced. Subprime loans made up the second largest group of mortgages –13 percent – followed by FHA loans (7%) and VA loans (2%). Keep in mind that these percentage breakouts pertain to homeowners who have mortgages. There are approximately one-third of homeowners who do not have a mortgage because they have paid it off.
Today, 92 percent of American homeowners – 51 million households – pay their mortgages on time. A recent Moody’s report estimates that just 8.8 million of those households have zero or negative equity. 15.5% of all mortgages seem to be the at risk ones. Did you also know that:
6.9% is the average yearly rate of appreciation of homes since 1952?
30% of all homes in the United States are paid off?
Buyers and Sellers and a Meeting of the Mind
Days on Market for listed properties in Denver has gone down slightly over the past 3 months. While 3 months doesn’t make a trend, it is indicative that our market is stabilizing. In fact, recent economics lecturers have stated that Denver is poised ahead of many areas to pull out of the real estate slump.
Contracts are increasing in my office, showings are up and open houses are busy. It’s nice to see that buyers and sellers can still have a meeting of the mind regardless of what the press reports. Lawrence Yun, the NAR Chief Economist, has stated that he feels by third quarter 2008 there will be a noticeable increase in home sales. A friend of mine who owns a highly regarded real estate company in Denver commented that he thinks the buyers who are buying today will look back in one year and find they’re, “in the cat-bird seat.” He thinks this is the point where the tide is beginning to turn.
The last time this happened in Denver – the late 1980s – many people looked back and said, “man, I shoulda done it a year ago!” I think that people who wait for the bottom often miss it and buy on the way back up. I guess that’s human nature.
What I wouldn’t do is wait for the press to tell you it’s a good time to buy. According to Warren Buffet, “when everyone else is panicking, it’s the time to buy.” (Something along those lines anyway). So go get help with your mortgage from a professional in the business with a trustworthy reputation and a proven track record. Use a Denver Real Estate broker of the same caliber. You’ll find your dream home and quite fretting over the news reports.