From where I sit: instincts of a mortgage broker.
These are questions I often ponder while I issue residential and commercial mortgages. It's fair to say that we have almost raised a current generation of real estate buyers who know nothing other than onward and upward pricing with a continual greater return on investment. A sizable number of them don't remember when the bottom dropped out around 1991. The real estate depression of the late 1970's appears to be a bleep to today's age group. They don't appreciate my personal concerns from about ten years ago, when I read a forecast from a Freddie Mac economist on how housing prices were going to stagnate because of the vast stock of new housing which would be built in America would retard any meaningful growth in value of older stock.
And while I compared these past experiences to what appears to be a slight cooling so far of our boiling over, sizzling real estate market--if distress and problems arise, I do not feel they will be as bad as the former situations.
While interest rates have been steadily rising in the past eighteen months--they are still relatively inexpensive when compared with the percentages Americans have been accustomed to for quite a while, or even when they were in the double digits for a few years.
Yeah, the current interest rates are not "bargain basement," but they are still fairly attractive and manageable for most people's budgets.
The forces and elements that were responsible for the previous market declines, even for 1991, are no longer present in today's economy. Alan Greenspan, who has been an important influence on mortgage rates through the Federal Reserve Board, is retiring after nearly two decades with this responsibility.
While the Federal Reserve Board remains a pressure lever in this picture, its strength has been diluted amidst other issues throughout the economy. (For example, international currencies along with pricing and supplies in certain industries like oil or natural gas are two indicators for interest rates.)
Just the same, the new, incoming Fed Chairman, Ben Bernacke, in an effort to generate some popularity and cast his own imprint, may want to reverse a few, recent Fed hikes.
Then too, the psychology and confidence of Americans in making a commitment to buy a pIece of real estate has been reinforced by the nation's ability to weather a series of disasters with little negative economic reaction.
I'm referring to the 9-11 tragedy where real estate values in the affected lower Manhattan area dropped about 1015%. Then, in a matter of a year, they had stabilized and continued rising. Even in terms of the Iraqi War or the Hurricane Katrina disaster--by and large, the economy appears to be motivating real estate investors.
From where I sit, about 25% of today's buyers appear to be foreign with money from global sources. This demonstrates that long-term, these people have a belief that real estate is pretty rock solid in America.
It appeared that the Japanese had significantly invested in the American real estate market during the 1980's, only to see their portfolios evaporate in our 1991 real estate depression.
A lot of foreign investment now appears to be more global in nature, sourced from places like China, Taiwan, Russiaor Eastern Europe. This is good, valuable business which enhances the security of America. These investors want to see a strong, economically healthy United States because now they have a financial stake in it. These people are not necessarily speculators planning to walk away. They are in it for the long-term.
At first glance, some people may be resentful that this level of foreign investment artificially drives up real estate pricing.
But overall, there are demonstrated benefits in terms of our global position to nurture and encourage a continued international presence in our real estate market.
This global dimension is another argument why the anticipated drop in real estate pricing will be a soft one, rather than a disaster.
Furthermore, I believe there is actually some hidden, pent-up demand, particularly for residential real estate. There is a quiet, low-key sector of affluent-to-high net worth people who are waiting for prices to drop before they step out and invest. This group contains people who may want to trade up to their dream home, people interested in buying a pied d'terre condo, people interested in a second home, even renters looking to buy their first home. The format and structure of mortgages in the past decade combined with the impact of the Internet on the documentation and closing process will make it a whole lot easier for say, distress owners to walk away from a property, and in terms of the lender or mortgage holder activating their turnaround course. Properties that reach foreclosure will unlikely be characterized through a dragged out, painful scenario (which was widespread in the 1991 real estate depression). Instead, they will be converted into relatively quickly performing real estate with a new buyer being identified.
In an effort to raise tax dollars, there's a lot of talk in Congress about curbing the enormous tax advantages of home ownership, scaling back the deductible benefits. Sure, a development like this would be a negative force on residential real estate. But it would probably be several years before it would take effect. And right now, it's just talk.
As a mortgage broker who has been laboring in a real estate market where splendid feast of lobster and filet mignon might be a simile--a breather or respite is understood, even welcome at this point.
Alois Ryan Rubenbauer, President, CEO, Liberty Equities Of America
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|Author:||Rubenbauer, Alois Ryan|
|Publication:||Real Estate Weekly|
|Date:||Jan 11, 2006|
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