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The Future Isn't What it Used to Be

By
Real Estate Agent with New England Real Estate Company

There's a saying that goes "the future isn't what it used to be".

 I can't imagine a more appropriate use of this adage than in today's real estate economy.  Tomorrow doesn't look anything like tomorrow did a year ago, and I think a year from now it will be even more true than it is today.

If, as many experts predict, 1.1 million potential homeowners will be locked out of the market because of the increasingly large default rate on sub-prime loans - then this will have a sustaining ripple effect on not only the real estate market, but importantly the national economy.  Sub-prime lenders (humming to the tune of Another One Bites the Dust) that are unable to pay down their warehoused line of credits will cease and desist operations completely.  The largest in Connecticut, Mortgage Lenders Network, was ordered to do just that by our Banking Department and a criminal investigation is underway.

Since I'm naturaly leery of the mainstream media, I'm not buying this 'temporary setback' scenario that I've been picking up on the wires as of late.  Because, if we were to be truly honest, we especially as Realtors know that the real fundamental problem is that home prices are simply too high on a value vs. cost basis.  It seems logical to follow that if a potential 1.1 million homebuyers are locked out of the market over the next 12 months, then home prices must continue to drop.  We are sitting on a high inventory that has already been reduced in many markets, and with credit tightening up (in some cases, drying up), this inventory is going to be further pressured.

Then there's the question of equity.  Remember when equity was a financial goal and not a bank account?  When home prices drop, so does equity.  Equity is what allows folks to move up in their housing goals.  Equity is what people lend their kids so they can buy their first home.  And equity is what drives the real estate market.  Even on a 450K home today, I have seen people lose over 50,000 dollars in equity in the past 6 months alone, which illustrates to me that the equity was never really there to begin with.

It's not enough for us to say 'people with marginal credit shouldnt have been given those loans in the first place".  We as Realtors are in the forefront of market valuation, homeowner counseling, and buying preparedness.  When banks can't or won't lend money on real estate, they aren't just losing faith in the homeowner, they are speaking volumes about the value of the assets, real estate.  And when banks lose their faith in real estate, they will take their money elsewhere. 

Before this all shakes out, look for more sub-primes to become submarines, for home prices to continue to drop, for more first time homebuyers to be locked out of the market, and for the real estate and banking industries to come up with out-of-the-box solutions to this growing problem.  The largest percentage of those boutique 0% and 1% mortgage loans will begin ballooning in 2008, and it will take some very creative business techniques to keep the country out of recession and upwards of 10% of the population out of foreclosures.  Forbearances, workouts, total refinancings and more will become commonplace lest the banks end up owning a couple of million more homes next year than last.

The future just isn't what it used to be.

 

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