May 9, 2008
Norwalk
Forum addresses housing slowdown, sub-prime credit
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by Jeff Yates
Hersam Acorn Newspapers
Lack of home buyer confidence and continued “screaming headlines” of doom and gloom scenarios are the main culprits in the continuing housing crisis, according to a national housing expert.
Dr. Lawrence Yun, chief economist for the National Association of Realtors, said housing market activity nationally is at a 10-year low, but he believes the market has bottomed out.
At a recent meeting of the Mid-Fairfield County Association of Realtors at the Norwalk Inn, Dr. Yun, Howard Pitkin, state banking commissioner, and Congressman Christopher Shays (R-4th) addressed more than 300 Realtors at a forum on the issues behind the housing slowdown and the possible solutions for those facing foreclosure due to predatory and sub-prime lending.
“Nationally speaking, we’re at a 10-year low. Home sale activity is matching the 1998 level,” said Dr. Yun, who added that the boom years of the late 90s represented an “overshooting” of the market. “It is my firm belief... that we are overshooting downwards” now, he said.
At the same time, Dr. Yun said local markets vary greatly from national trends, and to rely on national statistics — particularly in “premium” markets like Fairfield County or San Diego — would be like watching the news for the national weather forecast where meteorologists said “the national forecast is for 47 degrees... what good does that do you?”
Dr. Yun said New England had been the one region of the country showing recovery signs before the credit crunch, and that price conditions in the Northeast are holding on, unlike in places like California, Nevada and elsewhere where home values are dropping rapidly.
What’s keeping the market down, he said, is lack of buyer confidence in light of media reports.
“They have the financial capacity, but they are holding back,” he said, adding some buyers are waiting for the prices to drop more before stepping in, while others are simply hesitant to invest in housing with all the dire warnings they see in newspapers and on television.
One story, picked up by national media, was that “in 2007, national median home price declined for the first time since the Great Depression,” said Dr. Yun.
But in the New York and Connecticut metropolitan area market, prices remained “essentially flat.”
“Unfortunately, this fear factor can be a self-fulfilling prophecy. “We are on the verge of going into an economic recession. If the housing market does not recover, we will certainly go into an economic recession,” he said.
Since August, when the credit crunch began taking place, housing prices nationally have stabilized to some extent, said Dr. Yun.
“The logic would say that this is probably the low point,” he said, adding his strong disagreement with Robert Shiller, economics professor at Yale, who said recently a 30% to 40% home value decrease could take place.
The reason for those statements, said Dr. Yun, is that studying home price to income levels shows that for years, it matched almost dollar for dollar, but in the housing boom years, home values far outstripped the incomes of the homeowners. Studying the numbers out of context would make it seem that home values would have to drop 30% to 40% to come in line with income, he said, but that’s not factoring in mortgage rates, which used to be 18% or 19%. With the lower rates, people making far less can afford much more, he said.
What happened in August to slow the housing market, he said, is that sub-prime lending had, up to that point, made up roughly 20% of all home buyers. Lenders, who had split up and packaged these loans and were all of a sudden facing financial crisis, have tightened up standards, taking one-fifth of the buyers out of the market.
Dr. Yun said at the same time that sub-prime loans were becoming a fad — as buyers were taking low two- to three-year intro loans because they saw skyrocketing home prices and assumed they could refinance down the road — the Federal Housing Administration loans for lower income Americans dropped to only 3% of the total buyer market.
He said now that things are settling, he believes FHA loans will see a resurgent growth back to the roughly 20% market share prior to the sub-prime surge.
“All of the foreclosure problems... are driven by the sub-prime borrowers” who make up 9% of all homeowners, said Dr. Yun. “Even though they represent less than 10% of borrowers, they represent more than 50% of foreclosures.”
Dr. Yun said 80% of home buyers are first home sellers, looking to upsize, downsize or move, but the housing downturn is also keeping many of them out of the market. “Psychologically, home sellers are resistant to lowering price,” because they have put “sweat equity” into their homes. They want to buy, but they can’t buy until they sell,” said Dr. Yun.
Going forward, Dr. Yun said the Northeast, and particularly Connecticut and areas around “superstar cities” like New York, will weather the downturn better than others.
“They always seem to defy the laws of gravity,” he said. “The Northeast region is the best performing region currently, and I expect that to continue.”
Solutions
Fixing the issue of sub-prime mortgages, and the predatory practice of some lenders to steer borrowers toward loans they could not afford simply because those loans paid the best commissions, is the goal of the state’s Task Force on Sub-prime Lending, said Mr. Pitkin, banking commissioner.
Some of the work will involve cleaning up the industry, while much of it will be about educating the public on financial issues.
“Forty years ago, when our mother or father bought a house, you probably had to put 20% down, had to have credit without a blemish, the banker probably knew your parents and would hold the loan for life,” said Mr. Pitkin. “Today, even for the informed, the mortgage instruments being used are extremely difficult to understand.”
In Connecticut, there is currently $15 billion outstanding in sub-prime loans, with 71,000 families impacted, he said. Eight percent of those families were past due at the end of April.
“That might mean more foreclosures coming down,” said Mr. Pitkin. “Foreclosures are going to be with us for some time and it’s anybody’s guess how many.”
Of home loans in the state, one-third are sub-prime or two-year hybrids, one-third are fixed, and one-third are other, he said.
“A sub-prime loan... people are lured in... by the low down payment and the fixed rate for two or three years,” with the thought that they can refinance when the loan is set to reset to the higher rate, said Mr. Pitkin.
“Obviously, in ’06 and ’07 when that market correction occurred, there was no more growing equity and people were locked in.”
Mr. Pitkin said to fix the problem, issues like a confusing closing process, lax underwriting, fraud and high fees have to be addressed, but “excess in America is no new thing,” and people have to be educated on loans, credit cards and personal finance.
“Look at our own government deficit of $10 trillion,” he said. “We’ve mortgaged our future in this country and sub-prime is just one factor of this.”
“We need to teach our children less about what happened 20,000 years ago, and more about financial literacy,” said Mr. Pitkin.
Aside from a systemic fix to the way people think about their own finances, Mr. Pitkin said the state is doing what it can to help families facing foreclosure.
The Connecticut Families program has $50 million set aside at the Connecticut Housing Authority and, so far, has spent $2.6 million helping 15 homeowners, with 40 more requests being considered.
The state also stepped in to help negotiate modified terms for 169 loans, with 988 more modifications in process, he said.
Those seeking help from the state may call 788-772-8313, he said, with one case being handled at a time.
Federal level
On the federal level, Mr. Shays said the government stepped in quickly with the stimulus plan, but now “we are going to take a breath and slow things down.”
He said the government bailout of Bear Stearns took some heat from critics, but was necessary to keep two or three other companies from also going down.
“There is no one in Washington who can speak with absolute authority on what we need to do,” he said, adding “every one of us in Congress... we are working overtime to learn what we need to do.”
With 5,213 sub-prime loans in Bridgeport, 2,500 in Stamford and 2,000 in Norwalk, Mr. Shays said there’s no question “we are going to step in.”
He said if banks are willing to take a hit by working with the government and homeowners, or allowing FHA to buy homes at 90% value, “I think you’re going to see Congress step in with enabling legislation.”
Asked about other solutions, Dr. Yun said a government tax credit to home buyers would be one way to spur the markets.
He said such a move, even if not substantial, would have the psychological impact in incentivising people to get into the market.
© Copyright 2008 by Hersam Acorn Newspapers
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