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Melinda (Cormier) Harnden Home Ownership Term Paper
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Melinda (Cormier) Harnden Home Ownership Term Paper

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A report on the housing market crash, and its effects on the economy

A report on the housing market crash, and its effects on the economy

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Melinda (Cormier) Harnden Home Ownership Term Paper Melinda (Cormier) Harnden Home Ownership Term Paper Document Transcript

  • Melinda Cormier 9 December 2008 ECN 411 Homeownership Its importance and affect on the economy
  • Cormier 1 Table of Contents Executive Summary ...................................................................................................................................... 2 Introduction .................................................................................................................................................. 3 A. Overview of the Problem .................................................................................................................. 3 a. Causes for higher homeownership rates in the past .................................................................... 3 i. Low Mortgage Rates ................................................................................................................. 3 ii. Federal Regulations .................................................................................................................... 3 b. Variables for current homeownership rate .................................................................................. 3 i. Interest Rates ............................................................................................................................ 4 ii. Adjustable Sub-Prime Mortgages ............................................................................................. 4 iii. Interest-Only Loans ................................................................................................................... 5 iv. Negative Amortization Loan ..................................................................................................... 6 v. Investment Funds & Mortgage Companies .............................................................................. 6 vi. Predatory lending practices ...................................................................................................... 7 vii. Investment properties .......................................................................................................... 8 viii. Home inventory & prices ...................................................................................................... 9 ix. Low income earners ................................................................................................................ 10 x. How these variables affected the economy ........................................................................... 11 B. My viewpoint .................................................................................................................................. 12 a. Where the housing market is headed......................................................................................... 12 i. The American Dream .............................................................................................................. 12 ii. The baby boomers .................................................................................................................. 12 iii. Immigration............................................................................................................................. 13 iv. Minorities ................................................................................................................................ 13 v. When and how the housing market will recover.................................................................... 14 b. The importance of home ownership .......................................................................................... 14 C. Conclusions ..................................................................................................................................... 16 a. State Governments ..................................................................................................................... 16 b. Federal Governments ................................................................................................................. 16 D. Works Cited ..................................................................................................................................... 17 E. Data Tables...................................................................................................................................... 20
  • Cormier 2 Executive Summary The current economic situation in which the country finds itself today is not unlike previous recessions we’ve faced. Throughout the course of the United States economy, there have been periods of great economic expansion and periods of severe retraction. Although these periods of recession may be difficult to live though, U.S. citizens have always managed to get by. The current recession we face today had started over a year ago and was caused by a multitude of variables. The issues discussed in this paper include the history of the housing market starting in the early 1990’s and continuing through today’s economy. Points of interest include a long period of relatively low mortgage rates, expansive economic growth, and decreases unemployment which was obtained by the creation of 24 million jobs from 1991 to 2001. Federal regulations allowed for more lenient lending practices with enabled more companies to supply mortgages to individuals who had not previously qualified. This paper also explores the various causes for the current homeownership rate which include increased interest rates, and adjustable sub-prime mortgages which borrowers failed to understand the ramifications of. Other forms of non-traditional mortgages included interest-only and negative amortization loans. The role of the investment funds and mortgage companies actions are also taken into consideration as they compounded the increasing large problem of bad debt being sold to investors for a high yield with very high risk. Predatory lending practices are also discussed in depth regarding their affect on individuals whom they target and their role and effect on lending laws and new regulations. Investment property purchases also took a hit when the housing market started to crash after the peak in 2005, leaving many with mortgages they couldn’t afford and many properties left vacant. As the number of homes for sale due to foreclosures increased, there were a tremendous number of vacant homes flooding the housing inventory market, forcing existing home sellers to reduce their prices in an effort to stay competitive. The average price of homes in the US has subsequently declined. As the economy began to tumble, the demand for jobs in housing related fields including construction and even home furnishing also dramatically decreased. As more individuals lost their jobs, the 2007 per capita income reached levels that hadn’t been seen for seven years. Each element has played a vital role in the downturn of the homeownership rate which we continually watch decline. Ideas are presented as to where the housing market may be turning to next as the baby boomers retire and immigration remains strong. The demographics of households are also shifting towards a larger minority contribution. The importance of homeownership as it affects the economy is also discussed, which includes the multitude of industries related to and supported by the housing market. Industries ranging from government agencies, to real estate professionals and all the way to retailers like Sears have been hurt by the downturn in the economy caused my the housing market crash. Recommendations are provided in an effort to prevent against future problems and shortsightedness of individuals involved with the housing market. Recommendations are provided to both state and Federal government, which include education and counseling so that individuals can fully understand the various types of loans available and stronger regulations to prevent against and monitor possible predatory lending practices.
  • Cormier 3 Introduction Home ownership has long been considered the American Dream. Today however, many American have yet to achieve that dream or hold onto it long enough to realize its potential. We will discuss the homeownership rate starting in the early 1990’s up to present day, exploring the various components of the housing market crash and where the future of homeownership will be. As we look at the status of the U.S. housing market and the role it plays in the economy, we must first discuss how important home ownership has been historically and where we stand today. A. Overview of the Problem a. Causes for higher homeownership rates in the past i. Low Mortgage Rates Home ownership rates have typically increased each year from 1900 to 2000 according to the US Census Bureau. The most dramatic rate increase occurred after the Great Depression, where the economy recovered extensively, tax laws became more favorable for ownership, the demand for new homes boosted the building industry, and more financial opportunities and options became available. At the end of the 1991 recession, low mortgage rates produced an increase in the home ownership rate until 2004. Housing costs had decreased by 20% from 1989 to 1996, making home ownership more appealing. With the economic boom of the 1990’s, there was a tremendous increase in income and a decrease in unemployment from 6.8% in 1991 to 4.3% in 2001. In just 10 years, almost 24 million jobs were created in various industries across the board (Rogers, ¶ 1). The 1990’s were one of the largest periods of economic growth the U.S. has even seen, however what goes up must come down (SoN 2008, 13). ii. Federal Regulations Federal regulations put pressure on mortgage lending companies to accommodate low income earners and minorities in an effort to increase the homeownership rate even further. Mortgage companies were able to then provide mortgages to individuals who had previously been turned away. This allowed for more borrowers to purchase homes, but also created unforeseen problems down the road. Prime mortgages began to rely on automated underwriting and statistical models of loan performance which meant less down payment and debt-to-income requirements (SoN 2008, 4). b. Variables for current homeownership rate From to 2001, the national homeownership rate rose by 3.8% with a peak of 69.2% in the fourth quarter of 2004, just before the housing market crashed. The third quarter homeownership rate of 2008 is 67.9%, just 0.9% higher than the rate ten years earlier. (Table 1)
  • Cormier 4 i. Interest Rates The combination of enthusiastic economic growth and the prospect of high rate of returns from the expanding housing market and predatory lending practices eventually caught up with everyone which then began the spiral downwards. The annual home ownership rate began to decrease, bringing current 2008 rates back to where we were in 2002. There were a variety of reasons for the sudden decrease so we will first discuss interest rates. The IRS announced that there would be a 1% interest rate increase beginning April 1, 2004. The increase would affect the real estate market in that buyers who would have been able to afford a more expensive home then pre-approved for much lower. ii. Adjustable Sub-Prime Mortgages Secondly we look at adjustable sub-prime mortgages, where the buyer is approved for a loan with a discounted initial rate that increases after 2 years. By definition, subprime lending is the provision of loans to households that have demonstrated an inability or unwillingness to properly manage credit (Carr, 5). Many buyers were too excited at the thought of owning their own home instead of understanding what these mortgages entail. Not only were buyers shocked to see their monthly payments dramatically increase every month after two years, but they didn’t have the available income to make those payments. In 1994 the total originations of sub-prime mortgages was 5%, by 2000 it had increased to 13% and then to 20% in 2005 and 2006. Many sub-prime mortgages were no longer being secured by Ginnie Mae, Freddie Mac or Fannie Mae but rather by non-agency entities. The increase in sub-prime mortgages and securitization by non-agency entities was primarily caused by relatively low interest rates and an increase on the reliance of credit scores and risk-based pricing rather than actual income and borrowing history (Barth, 4). Many investors viewed the bundled sub-prime mortgages provided by non-agency entities as a better investment with a higher yield than the 10-year Treasury note which fell to 4% in 2003 after being at 6% just three years earlier. Treasury notes rose to 4.8% in 2006 and have remained relatively flat since. Many investors and lenders did not see the sub-prime mortgage market as a segment too risky to invest in, as the increasing housing market seemed to provide the perfect opportunity for such a high yield (Barth, 4). According to James Carr and Lopa Kolluri of Fannie Mae, “the subprime market is the credit source of last resort for households with poor credit histories, insufficient documentation of requisite financial resources or other important loan application information, and other loan application shortcomings that would limit a prospective borrower’s ability to secure credit from the prime market” (5). Borrowers also saw these sub-prime mortgages as a good deal when looking to the future real estate market and the increasing price of homes and home equity. Borrowers were looking at the trend in home pricing, where the average annual home price rose 9% from 2000 to 2006, compared to the relatively small increase of 3% in the decade before. For a real world view, a home worth $150,000 in 2000 would be worth $251,565 in 2006 (Barth, 5).
  • Cormier 5 The sub-prime mortgage market began to fall in the summer of 2007, when several lenders filed for bankruptcy and many other financial firms also suffered losses from sub-prime securities. There was also a large increase in the number of foreclosures on sub-prime mortgages, mostly occurring within or just after the two year period when payment shock occurred and borrowers could no longer afford their homes. The foreclosures from 2000 to 2006 are estimated at near doubling over those six years, which had previously never occurred. According to RealtyTrac there was one foreclosure for every 617 households in November 2007. There are some estimates for the total cost of the sub- prime market crash ranging from $150 billion to $500 billion as of 2007 (Barth, 5). Not all sub-prime mortgages were bad, but rather helped first time buyers own their home and helped many others increase their creditworthiness to then qualify for prime loans. Also the loan itself was not the cause of foreclosures in many cases, but rather subsequent circumstances after obtaining the loan. Factors contributing to these foreclosures include divorce, unemployment and health problems among many others. One of the most crucial determining factors of the loan’s success was the decline in home prices. Many individuals found themselves owing more on a house than what the house was worth, also known as being upside down or underwater (Barth, 5). Many agree that stronger regulations on lending practices are needed to ensure that individuals who apply for a loan are actually qualified and the numbers aren’t fudged. Also, by educating borrowers on the variety of loans available to them, we could be sure the borrower fully understands the terms and conditions of the loan before proceeding. iii. Interest-Only Loans Another variable in the equation to consider are interest-only loans. Interest-only loans allow the borrower to cut initial payments by paying only the interest in the first couple of years. Borrowers pay nothing on the principal balance, only interest for sometimes up to 10 years. After the period of paying the interest down, there is a large increase in monthly payments. Many fear that by only paying the interest and not on the principal, that if or when the house equity drops, they will owe more on their house than it is actually worth. It also takes much longer for the
  • Cormier 6 borrower to build up equity in the house. Many professionals in the lending industry feel these types of loans are much riskier than others, where the borrower is essentially buying a home which is outside of the price range for their income (McGinn, ¶ 4, 5). A real world example of an interest-only loan would be on a $200,000 loan, with no money down. A fixed-rate 30-year loan would have monthly payments around $1,230 whereas an adjustable-rate interest-only loan at 3.38% would have a monthly payment of $563. The smaller monthly payment does not last throughout the lifetime of the loan, once that interest-only payment period stops, the monthly mortgage payments dramatically increase and many borrowers are unprepared (McGinn, ¶ 4). iv. Negative Amortization Loan Another variable is a negative amortization loan also known as “Option ARMS” or “pick-a-payment” mortgages. These mortgages allow the borrower to pay a minimum monthly payment less than the interest-only option. The difference is then added onto the balance of the mortgage. There is usually some form of introductory low interest rate for the loan, coupled with low minimum payments but eventually those incentives disappear and all that’s left is an adjustable-rate mortgage with more principal than you started with (Block, ¶ 1, 2, 6). Many borrowers choose these options because they believe they will not be spending more than five years in their home, but unfortunately this type of loan could interfere with plans to sell, especially if the value of the home decreases and what the house could have been sold for to pay off the loan is now in inadequate. Few borrowers also take into consideration the cost to sell their house, which includes closing costs and real estate commissions which typically take 6% to 8% of the final sale price (Block, ¶ 13-15). v. Investment Funds & Mortgage Companies Investment funds and mortgage companies also played a huge role in the current economic situation. Two chartered government companies, Freddie Mac and Fannie Mae are in charge of keeping mortgage money flowing; however with the recent surplus of mortgage- backed securities flooding the market, they are having a hard time managing the influx. These two companies package mortgages into securities to be sold to investors. Freddie Mac and Fannie Mae guarantee these securities so if the loans default they will pay the interest and principal. The guarantees by Freddie and Fannie have historically been viewed as nearly as solid as the government (Hilzenrath, ¶ 1-4, 6, 7). Investors have been weighing the options for mortgage backed securities from Freddie and Fannie versus U.S. Treasury securities which have similar terms. Investors have been declining interest in the mortgage backed securities, as evident by their increasingly high rates. Many investment firms have been dropping Freddie Mac and Fannie Mae securities in an effort to recoup their losses on “less-marketable mortgage investment” according to Kevin Cavin, a mortgage strategist at FTN Financial Capital Markets (Hilzenrath, ¶ 8, 10). Until recently Freddie Mac and Fannie Mae were only allowed to take on mortgages up to $417,000 but the government has now increased that limit in areas with relatively high housing costs in an attempt to boost the U.S.’s declining economy and increase the availability of large mortgages. Policymakers are hoping that by increasing the availability of loans, Freddie Mac and Fannie Mae will be able to help existing mortgage holders in renegotiating their loans (Hilzenrath, ¶14, 16).
  • Cormier 7 Like any other investment firm, Freddie Mac and Fannie Mae must maintain a certain amount of capital as a cushion against losses, but this restriction is prohibiting Freddie Mac and Fannie Mae from purchasing more securities for their own portfolio. Their regulator the Office of Federal Housing Enterprise Oversight is charged with determining whether the amount of capital should be limited in order to allow them to purchase more securities to compensate for the lack of demand by other investors (Hilzenrath, ¶ 11, 17, 18-19). vi. Predatory lending practices Predatory lending practices have also played a large role in the downturn of the economy. Predatory loans are characterized by higher than normal interest rates or fees, and abusive speculations that do not help the borrower which include balloon payments, large pre-payment penalties and underwriting practices that disregard the borrowers’ ability to repay the loan. Not all high interest loans are predatory; it varies dramatically on a case by case basis. It is difficult for regulations to determine what is considered predatory because each case is unique, so there has yet to be any one regulation across the board (Carr, 1). Another issue with determining a predatory loan is that there is little to no publicly available data on loan terms, including origination points, interest rates, processing and closing fees, special provisions like balloon payments, prepayment restrictions and credit life insurance. Without that information it becomes very difficult to monitor or identify possible predatory lending practices. Environments where predatory lending practices are most commonly reported are in areas where traditional financial services are uncommon, and instead pawn shops, title lenders, check cashing outlets and other similar operations are used (Carr, 1-2). There are three basic characteristics used to identify predatory lending practices (Table 2). The first is targeting a specific market based on their demographics which could include race, age, ethnicity, and gender among other characteristics. Predatory lenders use available technology and data to identify potential customers whom they deem as uneducated or vulnerable to accepting loan terms which are detrimental to the individual. The elderly and individuals who own a large portion of equity in their home make perfect targets for predatory lending. Tactics used to attract potential borrowers are advertisements on the television as well as direct mailings, cold calling, and door to door solicitation which entice the individual with guarantees of lower monthly payments with extra cash to use however the individual needs (Carr, 2-3). The second characteristic of predatory lending is the abusive terms that the loan contains. These loan terms are most commonly designed to provide the largest profit to the lender with little regard to the financial well being of the borrower. Negative amortization loans, as previously mentioned, can be viewed as predatory lending if the borrower does not fully understand what he/she is signing or is tricked into signing a loan based on false pretenses or guarantees. Unusually high fees or inflated costs such as excessive prepayment fees, high origination and administration fees, and exorbitant appraisal and closing costs can trap low- income borrowers into the loan (Carr, 3-4). According to the Detroit Alliance for Fair Banking, 80% of subprime mortgages contain prepayment penalties, where only 2% of prime mortgages do. These penalties can reach up to 6% for early payments where prime mortgages rarely have any prepayment fees at all. Subprime borrowers are essentially locked into their loans without ever having the benefit of lower interest rates that prime mortgage holders enjoy (Carr, 3).
  • Cormier 8 The third characteristic of predatory lending practices is fraudulent behavior, which is the illegal management by the lender to provide the maximum profit to the lender. Behavior of fraudulent practices can include providing obscure information or not explaining the terms of the loan, using high-pressure tactics to prevent the customer from exiting the application process, failing to explain balloon payments or credit life insurance and discouraging borrowers from exploring lower-cost options (Carr, 4). Other documented behaviors are forging loan documents, adding co-signers to the loan whom the lenders are aware will not be contributing to the payments, and the use of high-pressure, abusive tactics for collection such as letters, phone calls and threats. It is a common occurrence for victims of predatory lending to foreclose on their homes without any proper legal action if they chose to sue the lender (Carr, 5). The main reason for the large number of unsuccessful redress is that there are still predatory regulations which need to be adjusted so that proper legal action can be taken against such lenders. Town and city governments are starting to address these problems by creating predatory lending laws which are sometimes difficult to pass due to politicians and bank intervention. Underwriting standards lessened with the increase in the housing market, requiring little or no down payment with little to no income documentation. Without properly identifying who qualifies for a loan, anyone wanting to purchase a home was able to. Creditworthiness is what determines which type of loan the individual qualifies for and which is most appropriate. It is defined as the measurement and ability of the borrower to repay the loan. Credit history is different than creditworthiness which is a common point of confusion for many potential borrowers. Credit history is the financial transactions data on which a borrower’s creditworthiness is determined (Carr, 7). Loan officers will recommend that any potential borrowers check their credit scores prior to applying for a loan to correct any possible mistakes. This allows the borrower to increase their credit score, which helps determine an individual’s creditworthiness. Recommendations to eliminate predatory lending practices include increasing prime market lending wherever possible, enhancing the enforcement of the federal and state lending and consumer protection laws, and improving the education that the borrower receives prior to signing a contract, in an effort to increase the awareness of financial service opportunities and options. There are laws that directly relate to predatory lending practices such as the Homeowner’s Equity Protection Act, the Fair Housing and Equal Credit Opportunities Acts, and the Real Estate Settlement Procedures Act (Carr, 8). vii. Investment properties Another variable in the equation for why homeownership rates are much lower today, are the investors who bought homes at a relatively cheap price, which were in need of repair, with the intention to refurbish the house within a small period of time and sell it again to make a profit. The concept of flipping a house has been a common occurrence for quite some time, and seeing as the housing market was booming towards the beginning of the 2000’s, many previously hesitant investors decided to hop on the band wagon. Based on the varying forms of mortgages available and the ease at which one could obtain one, it was all too common for houses needing a little TLC to get scooped up and sold again in a few months for more than it was bought for. This worked fine for a few years, but when the market took a downturn, it took many of those investors with it. They were too excited
  • Cormier 9 to grab up properties with the hopes of doubling their money in the near future, none of them predicted how quickly it could turn sour (Leland). viii. Home inventory & prices In 2001, the housing market had 121,480,000 homes for sale with over 14,000,000 of those vacant. By 2007 there were 127,958,000 homes on the market with almost 18,000,000 vacancies. In just six years an additional 6,478,000 homes were added to the market with more than 3,000,000 vacancies (Table 3). The number of vacancies in 2007 more than doubled what it had been just two years earlier. The homeowner vacancy rate gauges the number of vacant homes on the market which rose to 2.8% in the fourth quarter of 2007, from 2.7% in the previous quarter (Phillips, ¶ 2). These vacancies show the number of homes that had more than likely foreclosed and the owners forced out of their homes. When compared to previous years, 2007’s vacancy numbers are staggering. The dramatic increase occurred in 2005 when the housing market started to crash and many home owners who had adjustable sub-prime mortgages had hit their two year mark and realized they could no longer afford to keep their homes. The Mortgage Bankers Association suggests that the number of foreclosures by the end of 2007 had almost doubled to one million. They reported that the number of foreclosures in the fourth quarter alone had reached 400,000. In 2005, there were over 7 million existing home sales, which dramatically decreased by 2007 with slightly over 5.6 million sales (seasonably adjusted). By August of 2008, that number had dropped to 4.9 million sales, and it continues to slide (Table 4). The trend in sale prices is also similar with the average sale price at $266,600 in 2005, dropping to $266,000 in 2007 and yet again in August of 2008 to $245,400 (not seasonally adjusted). There was an 8.9% decrease
  • Cormier 10 in price from August 2007 to August 2008, clearly showing a struggling housing market with an overload of inventory (Table 5). By the end of 2005, high interest rates and relatively high housing prices dropped the demand for housing as is evident by the number of sales in 2006 which decreased by 8.5% from the previous year. For the first time in 40 years, the 2008 national median single-family home price fell below the norm, leaving many homeowners upside down (SoN 2008,1). The increased supply in the number of homes for sale has forced sellers to reduce their selling price in an effort to stay competitive with all the bank foreclosed properties flooding the market. It is truly a buyer’s market at this point; however the challenge is not finding a good deal, it is finding a lending company willing to provide a loan. As of 2000, the per capita income was $26,905 (in 2007 dollars) which had been steadily decreasing each year. There was a short lived increase in 2005 and 2006 at the peak of the housing market boom. It fell again after 2006, landing at $26,804 in 2007. As housing prices were increasing, per capita income was decreasing, which in turn had mortgage lenders providing loans to individuals who should not have been eligible for those loans based on their financial information. ix. Low income earners In 2006, nearly 39 million households who were paying their mortgages were moderately cost burdened, meaning that more than 30% of their income was paying for their mortgage. From 2001 to 2006 the number of severely burdened households, who pay more than 50% of their income towards housing expenses had reached 18 million. This large increase fell especially hard on low-income earners with nearly half of all households severely cost burdened, versus only 11% of middle class and only 4% of upper-middle class in 2006. A large gap in available funds was being created by the maintenance costs and the number of low-income and part time jobs which created an enormous strain on lower-income households (SoN 2008, 4). Due to the decrease in available funding and affordable housing, many low-income earners turned to rentals instead; however when the demand for low-income rentals sky rocketed, the supply of these rentals has greatly diminished. The supply of affordable rentals for households making under $16,000 decreased by 17% in just ten years, from 1995 to 2005. Under the Low Income Housing Tax Credit program over 135,000 rentals have been constructed annually, however the investors who are receiving discounted tax credits for investing in this type of real estate have been requesting a higher yield. Fewer additional rentals will be created in 2008 and possibly the future as a result of the unused tax credits. Unfortunately only about 25% of eligible renters are receiving subsidies, and even fewer cost-burdened households are receiving government support (SoN 2008, 5).
  • Cormier 11 x. How these variables affected the economy In 2007, housing permits decreased by 24% nationwide with multifamily permits down 9% and single family permits down 29% for the year. Permits declined in 94 of the 100 largest metropolitan areas from the 2005 peak. The drastic cut back in issued building permits had builders wondering how they would be able to get rid of the newly built homes and how they would continue to make a living if no one was in the market for new construction. There were 232,000 fewer construction jobs than in 2006, which caused the unemployment rate in many states to dramatically increase. Florida is one such example, where they lost 74,000 construction jobs and only gained 52,000 jobs in other industries (SoN 2008, 7, 8). The drop in housing prices affected the homeowner’s ability to borrow against their equity, which meant they spent less than previously observed. This inability has created a tremendous strain on the economy where in 2007, real home equity fell 6.5% to $9.6 trillion. Home equity withdrawals decreased as did the housing prices, which accounted for ½ of a percentage point decline in real consumer spending and over 1/3 of a percentage point in total economic growth. The decrease in residential investment also skimmed almost one percentage point off growth. The decrease in home building has been held responsible for the decline in residential fixed investment (SoN, 9). On a more local level, as more foreclosures occur in a community, less municipal taxes are collected. The taxes associated with property values and real estate taxes play a vital role in funding a community. If those taxes are drastically reduced, the cities and towns must find
  • Cormier 12 alternate sources for funding which creates hardship on the citizens within the community. The drop in housing prices for neighboring homes of foreclosures is also taking a negative toll on homeowners. Their property value is affected by the externalities of the foreclosed properties in their neighborhood. A basic example would be when a relatively upscale neighborhood has one home with six broken down cars in their driveway and a lawn which hasn’t been mowed in years. The externality from the house with less than desirable attributes creates negative consequences for their neighbor’s property value. B. My viewpoint a. Where the housing market is headed i. The American Dream It has always been the American Dream to work hard, form a family and own your own home. Many individuals immigrate to the United States specifically to have the economic and political freedoms they lacked in their native homes, however many U.S. citizens are hesitant to believe that dream can be achieved. A recent survey performed by the Polling Company which was sponsored by the Small Business and Entrepreneurship Council, asked 178 small-business owners and self-employed workers at the beginning of November, if they believed the American dream was still alive. 37% said yes they do believe it is alive, 57% said the dream is on “life support,” while only 6% believed the dream was dead with a margin of error of 3.5% (Polling Company, 4). The reason for the 57% uncertainty mainly stemmed from a lack of confidence in the economy, and the direction of government policies regarding health care and taxes, however there were still almost 40% who believed the American Dream still existed. That type of mentality certainly shows that the American people believe in something more than living paycheck to paycheck, and still do have the desire and drive to become a successful homeowner. The American Dream is not dead. ii. The baby boomers 78 million baby boomers are about to hit retirement (Hagerty, 3). Not only will that create an enormous problem with social security but also their living arrangements. As we all know, there comes a certain time in life when we simply can not care for ourselves anymore and need help from others. This demand is about to shoot through the roof with millions of soon to be retirees entering a stage in their life when perhaps the cost and responsibility of maintaining their home is just too much of a challenge. According to Dowell Myers, a professor of urban planning and demography at the University of Southern California, people ages 75 to 79 are three times as likely to sell their home versus buying. This will create an additional problem to the already flooded housing market. Of course there will be the younger generations who are excited to snatch up these homes in need of a little TLC, but only in the areas they want to start their lives. Baby boomer type communities typically aren’t the most appealing place to settle in with a young family and children (Hagerty, 4). The other aspect to the baby boomers retiring is that unlike their parents who retired to warmer sunny locations like Florida, the baby boomers are more apt to move to urban locations or near cultural centers and friends, which could increase demand for those locations which had previously been sought after by young professionals working in the city. Urban neighborhoods
  • Cormier 13 could see an increase in housing prices; however much of this is just speculation, as we do not actually know how the baby boomers will respond to retirement (Hagerty, 2). iii. Immigration Our country was founded on immigration and still continues to thrive on their arrival and assimilation into our culture. As we look at the demographics of countries around the world, the U.S. is an aging country with one of our only sources of population growth being immigration. The fundamentals of the housing market are determined by birthrate, income, immigration and the size and nature of households. In order to best estimate where the new homeowners will be looking to buy, we must understand what they’re looking for in regards to culture and environment but most importantly where income and job growth are strongest. William Frey, a demographer at the Brookings Institution predicts that immigrants are most attracted to states like Virginia, North and South Carolina, Georgia, Florida, Nevada, Arizona and a few locations within California which maintain lower housing costs (Hagerty, 2). As long as immigration continues to increase our population growth, there will always been a need for housing, no matter what the level of income. Assistant programs and subsidies are available to those who qualify so anyone willing to work hard and do the paperwork can afford housing. As mentioned previously, tax credits are available to investors; they just need to use them to their full advantage. There are also a significant number of immigrants who have higher-incomes that constitute for a growing percentage of homeowners (SoN 2008, 13). iv. Minorities In the six years between 2000 and 2006, minorities contributed to over 60% of household growth. Minorities now account for 29% of all households, which is a large contribution. Minority households are also typically younger than white households, meaning their household growth between the ages of 35 and 64 should remain strong for at least the next ten years and will occur on a much broader spectrum than white households. In the next ten years it is estimated that white households will be mostly older couples without young children, and older single households, whereas minorities have lower average ages and more children. Single- family households will be the most common form of household emerging with minorities, as
  • Cormier 14 is evident with the changing social patterns of the household. Minority households have also shown to contain more than one family in a home as a means to share the cost burdens. This tendency is expected to change as the number of minorities living alone is increasing (SoN 2008, 13). v. When and how the housing market will recover It has been noted that six of the previous seven housing market crashes have occurred prior to a national recession within two years. The housing markets usually rebounded strongly after the recessions with an increase in the number of new home starts, but only after there is a decrease in the number of existing new homes in inventory. In order to rebound from the current recession we face today, the demand for new homes must increase which would require more stable home prices, as well as increasing home prices, increase employment for job growth and an increase in the availability of credit for borrowers. Those four items along with a steady increase in immigration will reduce the flood of inventory to bring the market back normal (SoN 2008, 10). To bring housing affordability back to 2000 levels, it would require a large interest rate reduction, rent reduction, large price declines, and real income growth. Energy costs have also made affordability difficult for many households, not just low-income earners but middle-income homeowners as well. The costs for heating and cooling have taken a significant amount of spending of cash which was previously spent elsewhere, especially with the increase in energy prices since 2006 (SoN 2008, 28). Perhaps more government assistance to aid in heating costs is necessary to alleviate some of the hardships facing cost burdened homeowners today. b. The importance of home ownership Homeownership has always played a large role in our country’s economy as it affects multiple industries and aspects. Not only is homeownership one of the largest investments most individuals will make, its one of the most important. Buying a home is not just writing a check and moving it, there is much more involved in the process than what comes to mind. The housing process starts with construction, either private or commercial builders, and the building
  • Cormier 15 permit process, which provides money to the city government and creates jobs for inspectors and administration. It also affects the building supply companies who provide materials for contractors to build new homes, as well as supplies for maintenance and repairs. Once the home is built, the contractor may use marketing tools such as signage, real estate books, and other forms of advertising to promote their new property. When a buyer is looking to purchase the above mentioned home, he must first get pre- approved with a loan officer at either a mortgage company or bank. The buyer then contacts and hires a real estate agent as his buyer’s agent who looks for homes within the pre-approved price range and area where there buyer has requested. Once the buyer finds a home he wishes to buy, the real estate agent writes up an offer called a purchasing sales agreement. If the seller accepts the offer, a licensed home inspector is hired to inspect the property which ranges from $300- $500. Once the inspection is complete and nothing needs to be either replaced or fixed on the property, the loan officer hires an appraiser who represents the bank that the loan will be taken out with. The appraiser usually cost around $350 and compiles various statements of income such as the buyer’s W2, bank statements and verification of employment; these items are then sent to the underwriter of the bank who looks at the compiled information to ensure that all of the documentation is in accordance with the bank’s requirements. If all the documentation is in compliance, the underwriter will package the loan and look for a secondary market to sell the mortgage to. Once the loan is approved, the underwriter sends the bank commitment letter to the loan officer who then contacts a title company. The title company performs a title search to make sure no leans are present on the property. These liens can be tax related both federal and local, contractor liens, bank, and mechanics liens. The search is performed through the use of the registry of deeds. If the title is free and clear of all liens, it is considered a marketable title and the title company then uses a closing coordinator to schedule the closing where the buyer and seller sign the contract. The process usually doesn’t end there, as moving companies are often hired to assist in the moving process, both with buyers and sellers. Contractors are also commonly hired after the property is purchased to replace or fix items that we not part of the contract. Items that could require the use of a contractor include tradesmen such as plumbers for remodeling a bathroom, carpet and countertop installations and many other skilled workers. Appliance, electronic and furniture stores also play a vital role in the housing market. In the second quarter of 2007, sales were down 5.2% at Home Depot and 4.3% at Sears (Gross, 6) clearly showing the impact that the housing market’s fall had on sales of household goods. As is evident from the long list of involved industries and agencies, the home ownership process requires the use of many aspects of the economy. According to Asha Bangalore, an economist at Northern Trust in Chicago, from November 2001 to April 2005, 788,300 jobs were created in the housing and housing-related industries, which accounted for 40% of the total jobs created in the United States (Gross, ¶ 4). If one aspect of the housing market starts to tumble, a snowball effect is created, which hurts multiple industries and jobs, which in turn negatively affects the economy and the worker’s ability to contribute. a. Other elements as substitutes for housing I do not believe there are any other elements of the economy that could substitute for housing. Home ownership is one of the largest investments anyone is capable of making.
  • Cormier 16 Nothing else compares in the number of facets used throughout the process, nor is any other investment as long term and expensive as personal home ownership. C. Conclusions a. State Governments It is essential for state and local governments to provide education and counseling to potential and existing borrowers to prevent similar situations in the future. Education must be given to properly identify the different types of loans including predatory lending, as to better avoid its negative consequences. Counseling should be offered to those who have found themselves with an overabundance of debt and bad credit to work their way through it rather than filing for bankruptcy which is detrimental to their future credit borrowing ability. Stronger regulations need to be imposed on lending companies to prevent predatory lending practices and to verify the borrower is qualified for the loan. These companies need to be held responsible for their actions as to prevent future occurrences and should not be part of the economic bail out plan if they fail to obey strict guidelines regarding income verification and credit history as well as other factors which determine a borrowers eligibility for a loan. b. Federal Governments The Federal government should help lenders restructure existing loans to prevent future foreclosures. They must also ensure that proper record balances are kept and maintained for auditing purposes. Underwriting practices must also be strictly monitored to help in lending practices, and legislation should be passed to set regulations and monitoring standards to prevent predatory lending. Allowances for unique situations in which a court will decide how the loan is to be structured is acceptable as long as these allowances are not taken advantage of.
  • Cormier 17 D. Works Cited Barth, James R., et al. “A Short History of the Sub-Prime Mortgage Meltdown.” GH Bank Housing Journal. 2.4 (2007): 2-8 < http://www.ghb.co.th/en/Journal/Vol2/04.pdf> Block, Sandra. "'Pick-a-payment' mortgage can be tempting, but risks high." USA Today. Academic Search Premier. EBSCO. UNH, Manchester, NH. 7 Dec. 2008 <http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=J0E406078128305& site=ehost-live>. Carr, James H. and Kolluri, Lopa. “Predatory Lending: An Overview.” Fannie Mae Foundation. (2001) <http://www.knowledgeplex.org/kp/text_document_summary/article/relfiles/hot_topics/ Carr-Kolluri.pdf> Gross, Daniel, et al. "The New Money Pit." Newsweek 150.11 (10 Sep. 2007): 28-30. Academic Search Premier. EBSCO. UNH, Manchester, NH. 12 Oct. 2008 <http://search.ebscohost.com.libproxy.unh.edu/login.aspx?direct=true&db=aph&AN=26 463092&site=ehost-live>. Hagerty, James R. "The Future FOR Home Prices." Wall Street Journal - Eastern Edition 252.130 (02 Dec. 2008): R1-R4. Academic Search Premier. EBSCO. UNH, Manchester, NH. 8 Dec. 2008 <http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=35498721&site=eho st-live>.
  • Cormier 18 Hilzenrath, David S. "Investors Dump Securities From Fannie, Freddie." Washington Post, The. Newspaper Source. EBSCO. UNH, Manchester, NH. 8 Dec. 2008 <http://search.ebscohost.com/login.aspx?direct=true&db=nfh&AN=WPT009598454608 &site=ehost-live>. Leland, John. "A Real Estate Speculator Goes From Boom to Bust." New York Times (09 Nov. 2007): 18. Academic Search Premier. EBSCO. UNH, Manchester, NH. 8 Dec. 2008 <http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=27913387&site=eho st-live>. McGinn, Daniel. "Magical New Mortgages." Newsweek 143.24 (14 June 2004): 61-62. Academic Search Premier. EBSCO. UNH, Manchester, NH. 8 Dec. 2008 <http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=13320576&site=eho st-live>. Phillips, Matt. "Home Vacancy Rates Post Sharp Increases." Wall Street Journal - Eastern Edition 251.67 (21 Mar. 2008): A4. Academic Search Premier. EBSCO. UNH Manchester, NH. 8 Dec. 2008 <http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=31426932&site=eho st-live>. Polling Company, Inc., the. “2008 Post-Election Survey of 800 Actual Voters.” Questionnaire. Washington, DC: (4-5 November 2008) <http://www.sbecouncil.org/uploads/Survey%20SBE%20Council%20TPC%20Post%20 Election.pdf>
  • Cormier 19 Rogers, William M. “Americans Need More Than an Economic Boom.” Center for American Progress. (8 April 2005) <http://www.americanprogress.org/issues/2005/04/b496537.html> “State of the Nation’s Housing 2008, the.” Joint Center for Housing Studies of Harvard University. (2008): 1-31. <http://www.jchs.harvard.edu/publications/markets/son2008/son2008.pdf
  • Cormier 20 E. Data Tables Source: US Census Bureau © Fannie Mae Foundation 200
  • Cormier 21 Table 2 (Cont’d) © Fannie Mae Foundation 2001
  • Cormier 22 Table 3. Estimates of the Total Housing Inventory for the United States: 2001 to Present (Numbers in thousands) 2001 2002 2002/r 2003 2004 2005 2006 2007 All housing units 121,480 123,318 119,297 120,834 122,187 123,925 126,012 127,958 ..Vacant 14,470 14,779 14,332 15,274 15,599 15,694 16,437 17,652 ….Year-round vacant 10,916 11,272 10,771 11,631 11,884 11,916 12,459 13,276 …...For rent 3,203 3,497 3,347 3,676 3,802 3,721 3,737 3,848 …...For sale only 1,301 1,277 1,220 1,308 1,307 1,451 1,836 2,117 …...Rented or sold 882 877 842 976 991 1,060 1,108 1,130 …...Held off market 5,530 5,621 5,362 5,671 5,784 5,684 5,778 6,181 ……...Occ'l use 1,887 1,902 1,819 1,989 1,967 1,884 1,858 1,993 ……...URE 1,064 1,035 995 994 1,068 1,128 1,198 1,139 ……...Other 2,579 2,684 2,548 2,688 2,749 2,672 2,722 3,049 ..Seasonal 3,554 3,507 3,561 3,643 3,715 3,778 3,978 4,376 ..Total occupied 107,010 108,539 104,965 105,560 106,588 108,231 109,575 110,306 ….Owner 72,593 73,713 71,278 72,054 73,575 74,553 75,380 75,159 ….Renter 34,417 34,826 33,687 33,506 33,013 33,678 34,195 35,147 Source: Current Population Survey, Series H-111, Bureau of the Census, Washington, DC 20233
  • Cormier 23 Table 4. Existing Home Sales Table 5. Sales Price of Existing Homes Year U.S. Year U.S. 2005 7,076,000 Average (Mean) 2006 6,478,000 2005 $266,600 2007 5,652,000 2006 268,200 Seasonally Adjusted Annual Rate 2007 266,000 2007 Aug 5,500,000 Not Seasonally Adjusted 2007 Sept 5,110,000 2007 Aug r 269,300 2007 Oct 5,060,000 2007 Sept 257,300 2007 Nov 5,020,000 2007 Oct 255,100 2007 Dec 4,910,000 2007 Nov 255,700 2008 Jan 4,890,000 2007 Dec 254,000 2008 Feb 5,030,000 2008 Jan 245,500 2008 Mar 4,940,000 2008 Feb 242,000 2008 Apr 4,890,000 2008 Mar 247,100 2008 May 4,990,000 2008 Apr 247,200 2008 Jun 4,850,000 2008 May 252,600 2008 Jul r 5,020,000 2008 Jun 257,900 2008 Aug p 4,910,000 2008 Jul r 253,300 vs. last month: -2.2% 2008 Aug p 245,400 vs. last year: -10.7% vs. last year: -8.9% ©2008 National Association of REALTORS® ©2008 National Association of REALTORS®