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The New Housing Paradigm

The Pendulum Swings Back

Written by Steve Christ
Posted April 19, 2011 at 6:14PM


Sometimes people ask me why I left the big money of the mortgage business behind at its height.

And when they do, I always tell them the same thing: that the mortgage business left me long before I ever decided to leave it.

That's because being a "mortgage consultant" at the peak had very little to do with how I was taught the business to begin with. Instead, it turned into a game where the only thing that mattered was the size of your pipeline and how many people you squeezed each month.

How you slept at night was your own problem. And no amount of money in the world was enough for me to live like that.

So when it all came crashing down, all I could say was, “See I told you so.”

As a mortgage guy, all I can you is that was pretty easy prediction to make—even though nobody believed it at the time.

But when you crumple up and throw away 50 years of mortgage wisdom in the blink of an eye it shouldn't have surprised anyone that disaster would eventually ensue.

In the end, it was only just a matter of time....

The good news is that the mortgage pendulum is swinging back to where it all began.

In fact, according to a the proposal released by the Federal Reserve today, lenders would actually be required to make sure borrowers actually have the ability to repay their mortgages before making a loan to them. Go figure.

The rule, which is required by the Dodd-Frank financial reform law, is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.

The proposed rules for a “qualified residential mortgage” include:

  • Minimum 20% down.

  • Owner occupied only.

  • Mortgage debt service to income no greater than 28%.

  • No prior defaults, judgments or BKs

  • Only straight 30-year mortgages No balloon payments, no interest only, no negative amortization.

The long story story short is that what was old is about to become new again. The problem is that is going to make purchasing a home as hard as it was before the train veered off the tracks.

That ultimately means fewer borrowers and even lower prices...

In the meantime, how people feel about housing as an investment continues to drop.

From Bloomberg by Kathleen M. Howley entitled: Americans Shun Cheapest Homes in 40 Years


Victoria Pauli signed a one-year lease last week to stay in her rental home in Fair Oaks, California. She had considered buying in the area, where property prices have slumped 57 percent since a 2005 peak.

In the end, she decided it wasn’t worth it.

I know people who have watched their home values get cut in half, and I know people who are losing their homes,” said Pauli, 31, who works as a property manager for a real estate company. “It’s part of the American dream to want to own your own home, and I used to feel that way, but now I tell myself: Be careful what you wish for.”

The most affordable real estate in a generation is failing to lure buyers as Americans like Pauli sour on the idea of home ownership. At the end of 2010, the fourth year of the housing collapse, the share of people who said a home was a safe investment dropped to 64 percent from 70 percent in the first quarter. The December figure was the lowest in a survey that goes back to 2003, when it was 83 percent.

The magnitude of the housing crash caused permanent changes in the way some people view home ownership,” said Michael Lea, a finance professor at San Diego State University. “Even as the economy improves, there are some who will never buy a home because their confidence in real estate is gone.”

The median U.S. home price tumbled 32 percent from a 2006 peak to a nine-year low in February, data from the Realtors show. The retreat surpassed the 27 percent drop seen in the first five years of the Great Depression, according to Stan Humphries, chief economist of Zillow Inc., a Seattle-based real estate information company.

If we’ve learned anything from this mess, it’s that housing is not a risk-free investment,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch Global Research in New York. “Everyone knows someone underwater in their mortgage or struggling to sell a home.”

About 11 million U.S. homes were worth less than their mortgages at the end of 2010, according to CoreLogic Inc., a Santa Ana, California-based real estate information company. An additional 2.4 million borrowers had less than five percent equity, meaning they’ll be underwater with even slight price declines, according to the March 8 report. The two categories add up to 28 percent of residences with mortgages.

Pauli, the California renter, said she has no such aspirations, at least for now. She pays $1,500 a month for her three-bedroom, single-family home with a two-car garage, granite kitchen countertops and stainless-steel appliances. Her neighbors who bought before the housing crash typically have mortgage payments of about $2,800 a month, Pauli said.

I don’t see myself purchasing, even with all the great prices I see,” Pauli said. “Going to bed every night worrying about your home value doesn’t sound like a good time to me.

This is one double dip that cannot be stopped.

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