Presented by Gary Watts - Real Estates Economist  -  August 2007

Brief History of Real Estate

Historically, housing downturns average 27 months. We are in the 23rd month of the current downturn, so once we are past this financial over-reaction, things should improve. The national median price of a resale home is 3.4% higher than a year ago and the pending sales index is moving back up.

1970 to 1980

A quote appeared in Business Week (late 1969) due to an increase in housing prices. "The goal of owning a home seems to be getting beyond the reach of more and more Americans". The typical new house today costs about $28,000. In 1972, interest rates were 7% and it would take over 24 years before a home buyer could be able to obtain those low rates once again. Today, we are in the low 6's. In 1973, banks had a run on deposits and for a period of approximately 8 months there were no lenders who were in a position to make loans to home buyers. This should have caused a collapse in the real estate market, but home prices continued to rise. In 1977, the National Business magazine stated: "the median price of a home today is approaching $50,000. Housing experts predict price rises in the future won't be that great."

1980 to 1 990

At the end of the 70's and into the go's, inflation hit 21.5% and home loans were reaching 18%! This was followed by a crash (and later bail out) of the savings and loan industry in America. Although large job losses were creating foreclosures, home prices continued to rise. By 1985, Money Magazine made this prediction about home prices: "The Golden-Age of risk free run-ups in home prices is gone." With a buildup in defense spending and huge growth in manufacturing sector in the late 198OYs, increased job creation led to a boom in home construction and home prices continued to rise. Then on November 11, 1989, a dramatic event took place: the Berlin Wall came down! With the Evil Empire (the Soviet Union) breaking up, things were going to change around the world and change quickly!

1990 to 2000

In early 1990, Congress began slashing funds for defense spending. Within a very short period of time, a lot of highly paid workers in both defense and manufacturing had lost their jobs. California home prices declined about 12% by 1996 when the San Francisco Examiner said: "A home is where the bad investment is." In the following three years, Caiifomia home prices rose 19.7%, wiping out all the losses of the early 90's and ended the decade with a net gain of 9.35%. The median price in California has not declined since 1996.

The Media

Today's media plays up bad economic news now more than ever, which leads to misconceptions about economic realty. Our economy is extremely strong, profits are superb and the world economy exploding.

• All you read and hear is that real estate is going down, yet last month, prices in the US rose 3.4% from a year ago.
• Foreclosures are supposed to be at a record high - but last year 98.83% of mortgages did not go in to foreclosure.

• The media reported 53,942 notices of default for the second quarter - a near record high. They are comparing it to the first quarter of '96 when 61,541 notices were filed but fail to mention that five million more homes have been built in the U.S. since then! 

•  What if the media's headlines read: "99.2% of Mortgages are NOT in Foreclosure"? The media and the financial markets have greatly overreacted to the real problems that have been revealed in the lending marketplace, which is typical.

The Sub-prime Market

It may surprise you to know that sub-prime loans make up only 5% of the US. total loan market and Alt-A loans (those with credit better than sub-prime but less than prime) total only 8% of all loans in the US.!

• These exotic loans became a major influence in the early 200O9s, but anyone obtaining them up through 2004 had very few problems due to rapid equity growth. Many with no money down purchases soon found they had 20% (+) equity within a year or two!
• Most of the problems with sub-prime loans originated in the summer of 2005 through 2006.

The media will still report about massive delinquencies and huge foreclosures in the sub-prime market, but those reports will not be accurate because they don't explain the difference between a delinquent payment, a notice of default, or a foreclosure. They tell us "Foreclosures at Record High!" but that is not accurate.

Source: Mortgage Bankers Association, National Home Builders Association, Inside h4orrgage Finance.

Delinquencies vs. Notices of Default vs. Foreclosures

Delinquencies

Delinquencies cover any missed payment - even if it is just for one month, it is reported as a delinquency.

• The delinquency rate on sub-prime loans was running at 13.77%, which is up 13.44% from the previous year. In the last quarter, the delinquency rate dropped to 12.4%!
•  The delinquency rate on Alt-A loans is only 2.69%. while prime loans are at 2.57.
• Combining the three rates with the loan volume gives you a delinquency rate for all loans in the U.S. of only 4.84%. The record low is 4.0%.
• On jumbo mortgages (anything larger than $417,000), the delinquency rate is 0.37%.

Notices of Default

Notices of default are filed when lenders1 loans have been delinquent for a specific period of time. These loans begin the foreclosure process. The four states of California, Florida, Arizona, and Nevada currently have the largest amount of loans in the foreclosure process. Yet, in the first quarter, 24 states saw a decline in foreclosure starts and 36 states saw a decline in the second quarter!

• Only 3.23% of all sub-prime loans have entered the foreclosure process, with most of the defaults occurring on loans from January 2005 to June 2006.
• Only 1.28% of all prime loans have entered the foreclosure process.

Foreclosures

Foreclosures occur when the buyer has been unsuccessful in curing the debt, and either a lender or an investor has acquired the property. As of last month, there was one foreclosure filing for every 693 homes in America.

• For sub-prime loans, 68% of the buyers are able to prevent the foreclosure by either refinancing the property or successfully selling their home.
• For prime loans, the foreclosure rate is 0.86%. Last year, the U.S. saw a combined foreclosure rate of only I .09%.

A final note about foreclosures: the #I reason they occurred was due to fraud.The #2 reason was unethical lending, followed by #3 - loss of job, and finally #4was medical reasons.

Source: Mortgage Bankers Associarion, Federal Reserve, Federal Bureau of Investigation