Market Trends and Why Republican Realtors & Mortgage Professionals Are Screaming – “Yes We Can,” This Election.
Keeping Rates Low & Why Buying a Home Is Still Better than Renting in Today’s Market[caption id="attachment_6370" align="alignleft" width="300"] Housing Analysis[/caption] Conflicted Loyalties We all know we generally live in a state of contradiction. We want to be environmentally conscious while we drive our SUVs; we want to conserve electricity, but we leave our AC units on throughout the day; we want to conserve water, but we water our lawns – we live in a constant state where there are certain beliefs and principles we either embrace fully or do so with certain limits, understanding that there will be times when we simply cannot comply with our principles. Politics is the worst or best (depending upon your perspective) illustration of this behavior. We wince at terms such as ‘redistribution’ of wealth; however, we expect our roads to be in good condition, our schools to be the best in the world, and public services such as police, fire, medical services to be responsive, and have the latest technology and best talent available. We are a conflicted populous struggling to reconcile the role of elected governance with the role of personal freedoms, especially financial freedoms. The Republican response to 9-11 was the largest expansion of the Federal government in a generation in order to elevate our nation’s readiness in light of the war on terror. The Democratic Party’s response to the collapse of the housing market was yet another expansion of the federal government in the creation of the Consumer Financial Protection Bureau (CFPB) and the passing and application of the Dodd-Frank Act of 2010. The former controlled the personal security of Americans, and the latter is intended to protect the financial security of Americans. Bankers are generally resistant to government regulation, yet applaud when the Federal Reserve keeps rates low. Real estate agents want to have their financial potential and practices largely unscathed (therefore resisting government regulation in the transaction of purchasing or selling homes), but they applaud government intervention if it keeps units moving, homes selling and consumers buying. When will we realize that we can’t have it both ways? If the government can intervene in favor of a specific industry (banking), the government can equally intervene against it (ask mortgage lenders). Depending upon your political persuasion, there are very different views in this election regarding how to grow the U.S. economy. It is equally understood that President Obama’s approach favors a ‘public’ society that expands local, state and federal government offices and ‘public’ companies whose commitments aren’t to consumers who have invested in them, but to companies who are represented by unions and have ‘public’ contracts. In this view, the public entity is to be the lead catalyst in the recovery. While many real estate and banking professionals may balk at this approach to our economic recovery, they are silently relying upon the Federal government’s support of the housing markets and hoping for a second term for President Obama. It is commonly asserted that it is more likely for interest rate deductions to be modified and least likely the Federal Reserve would intervene under a Republican administration. And in this case, what may be good for our economic recovery just may be challenging to the housing industry. But will the Federal Reserve’s policies really change with the change of administrations? Who really knows? President Obama didn’t close Guantanamo; Bernanke worked for President Bush and his policies have been advanced under the current administration; and President Obama has been more of a hawk than his predecessor in his use of drones while pursuing our security interests behind the borders of sovereign nations. This is the political paradox of American democratic politics today. We live with a daily list of contradictions; we, as a result, have conflicted loyalties. So, it is bittersweet when Chairman Bernanke announced on September 13th a third round of what is called “quantitative easing,” an unconventional monetary policy tool to designed to stimulate the economy. Well, what really is it? Is it good for our economy? What should every Realtor understand about the impact of this on their business? As much as this feels academic, every real estate professional should be prepared to answer questions from consumers, even on a high level regarding how such actions affect a buyer or seller’s decision whether or not to move forward on their home. Whether you are a loan officer or a real estate broker, you need to be thinking middle to long term for your business. The best way to serve your customers in the short term is to have an understanding of the long term. If you can’t provide that level of reassurance to your clients that now is the right time to refinance your home, or it is the right time to invest in a short sale, or it is the right time to purchase a home as a first-time home-buyer, then you are essentially undermining your own capacity for growth and success in today’s market. In a market where there are many successful real estate agents, you will be one of those agents wondering why the deals or the referrals don’t come your way. The way to gain traction fast is to stay on top of the market and where it is headed. The more you see the future, the more successful you will be in the present. Quantitative Easing: The third time is a charm To put it not so simply, quantitative easing (QE) is an unconventional monetary tool used by central banks to stimulate the economy. It is a defibrillator of sorts, in place to regulate the pace of economic growth. During a recession or if the economy lacks “stimulative” growth, the Federal Reserve elects to reduce short-term interest rates in order to motivate lending and spending. You have to remember that our economy revolves around spending money, not saving money. So low interest rates don’t encourage money to sit still; they inspire one to borrow and spend. But at this point, the Federal Reserve has cut interest rates essentially as far as they can go, and yet the economy is still struggling and banks aren’t lending. This is the principal reason why we see capital reserves of corporations and banks at historic highs. They are able to borrow money, increase margins, and replace lost assets from the market crash while increasing the borrowing criteria in order to lend. This in turn enables broader trade margins when securitizing mortgages or other lending products because the risk has been so far minimized by lending to the consumer cream of the crop that investors are willing to pay handsomely for such security pools. As a result, the cycle is repetitive: banks collect historic net income levels while lending to the most qualified borrowers while borrowing money at historic lows for mergers and acquisitions. This is why we are seeing a consolidation across all industries where larger corporations are becoming larger, and the small and family-owned businesses can’t get loans and are competitively squeezed out of their markets. There is a disappearing middle class all right, but it is the small to midsize businesses that are disappearing at an alarming rate. So the federal government is in a bind; it is left with quantitative easing, which enables the Federal Reserve to print money and purchase long-term treasuries or mortgage-backed securities from commercial banks and other institutions. This continues the monetary flow while reducing long-term interest rates. In theory, when this happens, investors are incentivized to spend money they have. Been There, Done That This is the third round of quantitative easing. In 2008, after the financial crisis occurred, the Fed started buying mortgage-backed securities and T-bills in order to boost the economy. Roughly $2.1 trillion was purchased by summer of 2010. QE-2 was put in place after the economy began to weaken in 2010. It is hotly debated whether or not such actions help or hinder the economy. Sometimes short-term gains can only lead to longer-term losses (mortgage crisis anyone?). It is argued that the first round of easing helped prevent the slide into a great depression; if anything it increased investor confidence that the government would function as a safety net for investors. It was effective in slowing down the skid and helping promote some price appreciation on goods. QE-2 is hotly debated, and in the years to come QE-3 will only be even more so as to its impact, positive or negative on the housing economy. While this is keeping rates low for mortgage borrowers, it isn’t actually boosting ‘lending’ or broadening access to mortgages for consumers. If anything, it is simply ‘wrenching the rag’ further by enabling borrowers ‘who quality’ to refinance or purchase a home, leaving out the majority of borrowers who are tenuous at their place of employment at best, and have a marginal credit score (a FICO of 640-690 is considered marginal). QE-3 will keep mortgage interest rates low through 2015, which will settle investors and instill confidence, and by the time this article was written there have been considerable gains in the stock markets. But the unintended but real consequences are more consolidation in the banking segment, larger profits, fewer borrowers, and for those who do qualify, the cost of their loans will only increase in light of further known and unknown regulatory requirements on banks (forms and more forms) due to the passing of Dodd-Frank in 2010. This is a vicious cycle, but there is nothing in place to break it unless provisions on the rates are put in place to establish various lending benchmarks with certain types of borrowers. This however will only lead to greater government intervention. The subprime product was largely created with minority and lower income borrowers in mind to inspire home ownership. We know where that government-induced bubble ended up. As stated in the beginning of this article, be careful what you wish for. More and more voices are dissenting on the efficacy of easing practices. Economic Outlook: Low Rates, Steady Deal Flow. 2013 Will Look a Lot Like 2012. Questions around inflation, the timing of interest rate hikes and regulatory changes are paralyzing the private sector, leading to an already confusing economic outlook. Try running a business, forecasting production or revenue, staging purchasing decisions or hiring new employees. Remember: you can’t buy a house if you don’t have a job, or if your job is at risk. Unemployment is just over 8% and many economists are pessimistically stating this is the ‘new normal’. It is a lowering of the American expectation, and this is deeply saddening to see from a sociological perspective. With most economies in Europe over 11% (averaged across 17 countries) and a trend that is suggesting it will get worse, not better, the outlook is very grim for economies with governments deeply involved in monetary and economic policy. Message for 2013: Buying Is Still Better than Renting With price increases in all 100 metropolitan markets, it is still cheaper to own a home than to rent, because of climbing rent pricing and, of course, the aforementioned low mortgage rents. This is important for real estate agents to highlight in your marketing messaging and seminars with consumers. The tax breaks for homeowners also are a vital component to the benefit of buying a home. Remember: buying a home is still a solid investment in the future of every consumer, especially as it pertains to income that could be realized from selling their home later in life. If a borrower is under the age of 50, there is no question they should buy a home – and if they can afford it, with prices and interest rates so low, they should buy two! It is no surprise that the most affordable metropolitan markets are Detroit, Gary (IN) and Oklahoma City (OK), with the costs of homeownership 64% cheaper than renting according to Trulia. The top 10 metros with the highest homeownership affordability are listed below. For real estate agents, in your advisory capacity with clients, I suggest discussing this list for investment purposes. In many cases, homeowners have children going to college, and they have the financial capacity to purchase a home in lieu of having their child/student live in college dormitories.
U.S. Metropolitan Area
Monthly Cost of Homeownership
|Oklahoma City, OK||$590|
|Warren, Troy, Farmington, MI||$588|
|West Palm, FL||$723|