Dave Stevens, former head of FHA and the current President and CEO of the Mortgage Bankers’ Association, is bullish on home ownership. According to Stevens, there’s sunshine on the horizon and it may be here sooner than anyone realizes.
A few days ago I had a chance to interview Dave Stevens about his take on where we are in terms of a real estate recovery. I also asked if he had any good news he could share in light of the constant onslaught of bad economic news. Here’s what he had to say.
1. The Market is Stabilizing
According to Stevens, the real delinquency rate is down from 10 percent in the second of quarter of 2010 to 8.5 percent for the second quarter of 2011. New foreclosure starts are also down. In addition, three of the hardest hit states for foreclosures, Florida, Nevada, and Arizona, are also stabilizing. Furthermore, for standard fixed rates loans, the delinquency rate was 6 percent in 2010. That number has dropped to 5 percent in 2011. As Stevens put it, “This is very close to being in ‘normal’ territory.”
2. Most Sectors Are Experiencing Real Home Price Growth
The problems with negative equity and declining prices are actually concentrated in a few key states. For example, 24 percent of the foreclosure activity is concentrated in Florida. Fifty percent of the foreclosure activity is in five key states. Stevens says that people who quote declines in the average price of homes nationally are using “dangerous data,” since each market is different.
According to Stevens, price declines are not a national problem. “The fundamentals are better than ever.” In fact, if you remove the foreclosure properties from the equation, non-distressed properties have actually experienced an increase in prices.
The challenge is consumer sentiment. People are scared to purchase now because they don’t know whether they will have a job. Nevertheless, for those who are willing to purchase in this market, the opportunity has never been greater.
3. The Best Time Ever to Buy
Many people view the cost of home ownership based exclusively on the price they pay for the property. A more accurate way to judge the cost is how much you paid plus the cost of the interest that you pay over the term of the loan. To illustrate this point, assume that a buyer is going to purchase a home with a $200,000 loan. The interest rate is four percent. Many buyers are worried about prices falling more. If the prices were to decrease another 5 percent, that means that the property would decline in value by approximately $10,000.
If the interest rate increases from 4 to 6 percent, the cost of waiting is extremely high. Over the life of a 30-year loan, the borrower will pay $87,937 more in additional interest. The cost of owning that home costs a whopping $77,937 more than the apparent $10,000 they might have saved by buying at the bottom of the market.
4. The Coming Home Shortage
Stevens says that there are two primary factors that will contribute to a home shortage in the not too distant future. The first of these factors is the size of Gen Y (those born between 1977 and 1994), which is estimated to be approximately 80 million or 25 percent of the U.S. population. They are now entering their prime time for starting their careers, their families, and for buying a home.
The second variable is supply. There has been virtually no new construction, despite the predicted explosion in population growth. To illustrate the severity of this problem, the 2010 census put the U.S. population at approximately 309 million. By 2050, the prediction is that the U.S. population will be 439 million. That’s a 130 million increase in just 40 years. Regardless of whether they own or rent, they will still need housing.
5. Getting from Here to There
Stevens believes the major challenges we are facing in the short term are job creation and dealing with the tight credit situation. The GSEs (Fannie and Freddie) as well as FHA have tightened lending guidelines to such a degree that is extremely difficult for even well qualified buyers to obtain a loan.
Furthermore, the tremendous amount of new regulation creates additional problems. For example, the Dodd-Frank bill alone adds over 100 new regulations. Each of these regulations creates additional risk resulting in higher costs for the both the borrower and the lender. Lenders have to alter loan documents, create new systems, and retrain their people to handle these new requirements. Furthermore, the effect of “piling on” more and more regulations increases the cost to consumers as lenders must defend themselves against additional litigation risks.
According to Stevens, real estate is now at bargain levels that we will never see again in our lifetimes. If there were ever a time to buy a home, that time is now.
Want to know more? Call me at 206-713-3244 or Emmanuel@EmmanuelFonte.com