Blog Post 9-18-07

Everywhere you turn today you hear news stories about increasing delinquency rates, foreclosures, falling home prices, and how the subprime mortgage fallout is spreading into prime mortgages. This could lead the economy into a recession in 2008 - 2009.

The time it now takes to sell a home continues to rise and the number of closed transactions declines as buyers cancel their escrows on new homes. With this constant exposure to negative news, many buyers, sellers and agents have become paralyzed with fear. With no hope of a real estate recovery in sight, many are figuring this is a terrible real estate market. What makes it even worse than reading the news is that many of US don't understand that the real estate market that is going through a normal, natural market correction.

Well we might just all relax and try to remember that real estate is traditionally a LONG TERM INVESTMENT. It's the negative press about delinquency rates, foreclosures, falling home prices that is so unrelenting, that WE ALL start to worry. So, after living through two down-cycles in real estate, I have some insights that can help each of us to survive in a falling real estate market.

The first step is to accept that this is a normal part of the cycle of real estate. It will not last forever, but after the incredible run real estate had between 2000 and 2005, history teaches us that it will be more of a slow to normal market for at least the next couple of years. No one can accurately predict when it is going to heat up again. Once you accept the reality that this is the MARKET WE ARE IN and that it's not going to quickly return back to a hot market soon, WE can look around and see the real options that WE have. I say WE because I too am a home owner and just like you, I have grown equity in my home over the years of ownership.

Is It Time To Get Out?

There will be a general attrition of agents, mortgage loan officers, title company personnel, builders and construction workers with this change in the market dynamics. This will be somewhat healthy for the real estate industry as difficult as it will be for some families.

For home owners, real estate investors and land owners, rather than "getting out" this will be an opportunity to add to your holdings. The funny thing is that when fear grips us, we act emotionally and can become paralysed instead of continuing on with our plans. During a hot market, the press typically exaggerates the opportunities in real estate, creating the impression that anyone can buy & flip a house and make a fortune. During a down market, they exaggerate the difficulty in selling a home and talk about the devastation of foreclosures, and the failure rate of people in the real estate business.

The good news is that while consumers are hearing about all the doom and gloom of real estate, they start to appreciate the value of what they already have. It is the idea of "value investing". Your property is undoubtedly more valuable than it was previously. We should pay attention to the fact that OPPORTUNITY COMES AS MARKETS CHANGE... SUCH AS NOW. It is a good time to get going with your plans and find an experienced Realtor® to help you.

It is time to get in!

The second step is to take some action. Start looking at listings, get qualified to purchase either with a second mortgage or home equity line of credit (rates dropped half a percent today!). Get out to look at property and follow through with your plans.

Here is what Jennifer Openshaw in an article Signs of the timeswith MarketWatchsays you as a borrower will need to do:

1. Better Credit. This one's simple -- that credit score is more important than ever. Scores generally need to be 50 points higher, says Edwards, just to get the same interest rate as just a month or two ago.

2. Down Payment. The market has all but evaporated for 100 percent financing. Most loans have at least 10 percent down, and "conforming" (20 percent or higher) is required for a high-probability deal.

3. The right lender. Lenders with a technology edge, like LendingTree.com and others, who can connect to hundreds of financing firms quickly, will give you an edge.

4. Income Verification. Especially for re-fi's, expect a long wait if you can't verify income. Self-employed individuals can still get financing with verification, but may pay rates 1/2 to 1 percent higher.

5. Patience. It will take longer, but try to get backups for your deal just in case. The good news: it won't require much more work or cost on your part. But your loan officer will be a lot busier.

Jennifer adds this:

And finally, a little sage advice for buyers: "It's a buyer's market. Now that doesn't mean you should wait forever. Depending on what happens, prices may drop further, but so might your buying power -- if interest rates go up or financing tightens. If you're thinking of buying, don't wait too long to find the bottom."