Since I’ve already had almost a dozen e-mails, phone calls and tweets asking me, “So how does the financial meltdown on Wall Street impact me as a Realtor?” I thought I’d take a few minutes this morning and throw out some observations and thoughts of what it might look like.
Before I do, let me remind you that we are in what could truly be called a historical (in a negative sense) event and therefore any prognostications are exactly that and it’s going to be interesting to see. But here’s what I see as some potential ramifications for the real estate markets:
1. Mortgage rates – due to the increased “danger” and perceived lack of safety in the stock markets, I think we’re going to see a major “flight to quality” as people pull money out of stock and into bonds. And, because Fannie and Freddie are now owned by the government, we could see a pretty nice drop in mortgage rates because of it. I also believe that rates will drop because (see #3) of the anti-inflationary pressures.
2. Non-agency loans – by Agency, I mean anything that is bought by Fannie, Freddie, FHA and VA. I believe that the death of Lehman and the forced sale of Merrill (as in, sell or die) are going to be, in many ways, the death knell (for the time being) for non-agency loans. If a bank can’t sell it on the secondary market (and the only secondary market that’s left is Fannie, Freddie, FHA and VA), then they won’t do it or it’s going to be very expensive. Now, there will be small exceptions to that where you have small community banks who are willing to do some creative portfolio stuff, but that’s going to be the exception rather than the rule.
3. Cash is king in the financial world – we’re going to see a tightening of credit in all forms of lending where it is being done with the bank’s own money. Commercial loans, equity lines, car loans etc. are going to be harder to get and more expensive. This will have a negative effect on an already hurting economy and will reduce the risk of inflation.
4. We’re not done with it yet. This isn’t the bottom, but it might be the start of reaching the bottom. Does that make sense? We aren’t done with the failure of financial institutions, but at the same time, the start of this might show that we are getting close to the point where we can see the bottom.
I’ll try to update again if anything else major shakes out. If you have questions or want to know more, e-mail or call me at (616) 292-7559. Or feel free to post them here and we can tap into the collective wisdom of the Bloodhounds for more insights.
Thanks for reading and hang on to your hats!
Bob in San Diego says:
Which means if you have an option arm tied to the MTA, the index is at 2.664% and dropping. With a margin of 2.5%, you are looking at a fully indexed rate of 5.2%. WaMu, CFC, Downey and IMB are more than willing to take your option arm and convert it to a 30-40 year fixed at the fully indexed rate.
When was the last time you saw a jumbo 5.2% fixed rate opportunity with a solid chance of getting it under 5% by year end?
September 15, 2008 — 7:34 am
Greg Swann says:
You are literally an answer to my prayers, Tom. I was hoping last night that you would take this on, to let the rest of us know what is happening. Bless you, sir. Thank you.
September 15, 2008 — 7:41 am
Tom Vanderwell says:
Greg,
You’re too kind, I’m just trying to help others navigate a really scary time…..
Tom
September 15, 2008 — 7:45 am
Michael Cook says:
“Hang on to your hats…” My hat flew off about five months ago. Now is probably the best time to lock in mortgage rates because there is a lot of uncertainty in the market.
Ironically it might be a good time to wait to buy housing. Obviously, this depends on the market you are in, but major markets will see a large shake out thanks to the dismal unemployment data. I am not as sure we are “near the bottom” because I could see additional banks going under over the next several months. We might be a year away from a bottom or we could be in for a Japan-like, decade long correction (lets hope not).
September 15, 2008 — 7:48 am
Sean Purcell says:
Tom,
Sounds like some pretty good pronostications. Michael’s comment not withstanding (God I hope the business/government complex is not so great that we are standing on the edge of a Japan-type debacle), I think the bottom is being hastened by the government’s refusal to bail either entity out. Finally, the great spenders of other people’s money have shut down the gravy train.
One small disagreement with #2: I think we might see local banks become a much larger player in the mortgage industry. In many ways the Wall Street melt down might drive us back into the (relatively safe) stone age of local banks, local knowledge and local responsibility (read: payment compunction).
September 15, 2008 — 8:17 am
Bob in San Diego says:
Sean, I’m already seeing a ramp up of local bank advertising for home loans.
Michael, my thoughts exactly.
September 15, 2008 — 8:20 am
Tom Vanderwell says:
Wow, Sean’s agreeing with me! Life is good! LOL
I think we are going to see local banks playing a bigger part, but I think, due to size and interest rate risk we’re not going to see that to a huge extent. Let me tell you a short story – a local accountant and past client of mine is involved in starting a new bank. He’s trying to get me to switch over (I said no.) He said they are going to do a lot of portfolio lending, but then he also admitted that they wouldn’t have the capability to portfolio enough to match what I’m doing production wise. The local banks don’t have enough cash to do too much portfolio lending…..
Does that make sense?
Tom
September 15, 2008 — 8:30 am
Sean Purcell says:
Tom,
Your friend obviously does not know what he is doing. Just explain to him how simple all of this is:
1. Offer 10% on deposits to have LOTS of cash to lend
2. Offer stated income, 100% LTV, local loans for lots of business
3. Advertise each loan at a 1% “Good Customer” rate
4. Explain the actual rate of LIBOR plus a 10% margin in fine print on page 74 of the loan docs
5. Book the interest payment you are not receiving rather than the minimum payment you are receiving
6. watch the profits grow
I mean come on… this is not rocket science. 🙂
September 15, 2008 — 8:53 am
Tom Vanderwell says:
Sean, I just forwarded him a link to this, so you can tell him….
Tom
September 15, 2008 — 9:24 am
MG - Arizona Housing Bubble says:
Tom, interesting point on the local banking aspect of things.
The local credit unions here – Arizona Federal and Desert Schools have both been quite successful during bust and boom for their conservative loan guidelines. I remember when I was shocked to discover they had absolutely zero programs for buying homes with nothing down during the peak bubble years.
Who on earth would refuse to lend money to people who already didn’t have any? Everyone was doing it!
While they’re being hit by the same bug as everyone else, refusal to jump into these shallow pools back then seem to be their saving grace right now.
The “local lending” aspect, I’d imagine, should also help them better understand their customers as you can more quickly modify terms, rates, and such when you understand how your particular area is being hit. This data might take a few extra days or weeks to make its way up the chain with larger national banks and I imagine that given their customer bases that could translate to a ton of money.
Keep us posted, many folks have been pointing at the CDO’s being sold to foreign investors and likening them to little timebombs, but few understand how the debt we sell outside, affects the prices we pay inside.
September 15, 2008 — 11:35 am
Jeff Elders says:
While we’re at we will look into NINJA loans too…Why not?
In all seriousness though, tell me how this mortgage problem is any different than the S&L crisis. Wasn’t that also a problem of matching the risk of long-term loans over short-term volatiliy?
September 15, 2008 — 11:43 am
MG - Arizona Housing Bubble says:
Jeff,
I think the primary reason this time is different is because we still have the variable cost of the war looming over us. In addition to that we have candidates who either support fully staying over there which requires us to print even more money, lowering an already weak dollar, or eventually pulling out as possible.
The problem is that both inherently promise that we’ll see more money get spent at a time when we drastically need to realize we’ve been cut deep (financially), pull back, and dress our wounds, before returning to the global poker table.
Unfortunately, in the short term at least, even an immediate pull-back from our presence overseas would require massive influxes of funding to perform all of the tasks associated with “pulling out” (sanitizing, organizing, etc.).
With the new foreign problems we’re facing (Pakistan, Russia, etc.), we’re also creating good amounts of “less-than-goodwill” among those that we may later rely upon to buy our debt.
Another possible problem coming up is that I don’t know that we have any more potential bubbles coming up. At least not like the ignorance-fueled ones we had with the dot.com and housing bubbles. In the beginning, those at least spurred growth and investment.
September 15, 2008 — 12:23 pm
Tom Vanderwell says:
Jeff,
Good to see you stop by! Seriously, I think that’s a good question, a couple of thoughts:
1. This time the mortgage “process” is much more leveraged and much more complex. CDOs, credit default swaps, MBSs, etc. make it much harder to have a good solid knowledge of what’s on the books.
2. My understanding (and I wasn’t in the biz then) is that the underwriting guidelines weren’t the issue then. Now the issue is that we wrote a lot of “stuff” that needs to get wiped off our shoes.
Sean? Michael? Anything else to add?
My understanding is that while it is partially a buy short sell long issue, it’s a quality of product issue more than that.
Tom
September 15, 2008 — 12:24 pm
Kam Hubbard says:
I’m astounded at what’s going on Wall Street in 2008.
Radio and TV show host Glenn Beck is looking more and more like a prophet right now.
September 15, 2008 — 1:54 pm
Michael Cook says:
Jeff,
This biggest difference is the leverage and who holds the hot potato. With the advent of securitization and derivaties, everyone could now own an interest in the mortgage industry and bet on its movements. In addition to that, there are so many products that trade on top of those products that now its everyone’s problem.
Imagine a house of cards… In this case, mortgage non-performance was the foundation card that cause the house to collapse. In the S&L situation, the house was a three bedroom. Now the house is probably just short of the Sears Tower. Rather than just seeing lenders and peer go out of business, you are seeing insurance companies, investment firms, a host of foriegn entities and a lot of individuals (hedge funds) lose their shirts.
This is a world problem now because of the globalization of banking. When small local German banks go bankrupt because of the US housing industry, you start to get the feeling of the scope of our situation.
September 15, 2008 — 2:31 pm
Thomas Hall says:
I just hope that the wave of unemployed investment bankers doesn’t flow into new licensed real estate agents.
September 15, 2008 — 4:25 pm
Bob in San Diego says:
The S&L crisis was a lot more than bad loans.
September 15, 2008 — 4:27 pm
jaybird says:
great post for the those of us who are not erudite in financial markets.
j
September 16, 2008 — 4:34 am