I've been somewhat quiet on Active Rain. Since August, mortgage origination has become an increasingly difficult job. While the business has generally slowed, we specifically, have been booming with demand. Unfortunately, it's not the demand I like. Californians, Arizonans, hell, many Americans, are up to their eyeballs in debt. Most couldn't afford it in the first place. These past few months, I've missed calls, eschewed family life, and tried to keep up with the tons of homeowners in trouble. I turn it all off on the weekends.
I read a lot. I realize that after I hit 40 (2 years ago) my weekends had transformed from chandelier swinging and body-boarding to a happy hours with real estate brokers, golf with stock brokers, and Church. Between those events, I consume blogs, Milton Friedman, Bill Gross, Barron's, and Knowledge@Wharton. I read a LOT because I'm a money geek. I love money, not in the materialistic sense but I love money. I guess I should say that I am intrigued by finance.
I prognosticate every week on Mortgage Rates Report about the direction of interest rates. I speculate on the direction of certain real estate markets. I follow specific companies and their demise on Wall Street. I follow the mortgage and real estate industries like a kid from the Bronx follows the pin-striped boys of summer.
Lenn Harley caught something I said a year ago and found it to be prescient (her word); I wish I were wrong. The comments in her post suggest that I should talk about the upcoming year; I really don't want to do that because I don't have great "visions" for 2008. Some thoughts about the next 12-18 months:
1- More not less of the foreclosure activity we saw these past 5-6 months will continue through 2008. A combination of ARM resets, tightened loan guidelines, and affordability problems will affect American homeowners in a dramatic way. It's easy to levy the blame on Greenspan, mortgage originators, Wall Street, or REALTORS but at the end of the day, the "greed" ultimately came from the homeowners. The American homeowner, aided by some opportunistic market participants, got drunk on the drug of materialism, financed by a world wide capital glut.He partied up the profits while the clock struck twelve. The foreclosures and continued short sales will be the hangover from the five year orgy we had in the first part of the decade.
2- The housing recession will extend to the American economy. Homeowners drew upon home equity like a a high-roller draws chips at the Venetian hotel in Vegas. Nobody will "stand up" for them with the bookies anymore. The money spigot is shut and won't be turned on no matter what the Fed does to interest rates. Less money means less disposable spending dollars. While, Virginia, there still is a Santa Claus, he won't be staying long at your house this year and might just skip you next year.
3- There will be a marked class distinction that develops within the next 6-7 years. It won't be determined by assets but by debt and its utilization. Those that respected money will get more of it; those that didn't respect it will lose it. That will have a profound effect on productivity as the "hourly worker" will become despondent about his life and stop pushing for the overtime. Why work the extra hours to make the mortgage payment when the house was lost in foreclosure? A commitment to mediocrity will be the mantra of the American worker because every disposable dollar will be spent payig the bar tab he ran up five years ago. Personal bankruptcies will rise.
4- Housing prices will drop...more. The aforementioned reasons for foreclosures rising will be the same pressures felt in the housing market in 2008. Prices will continue to drop until a level of affordability can be established. That means that the investors (real investors put 20% down) will step in when the deals cash flow. It also means that until the rent v. buy figure is at parity, the incentive to own will be tabled until the economics of homeownership make sense. Determine the median income for your metro area, multiply it by 5 and that's your new median price. In San Diego, the income is about $70,000 which predicts a median price of $350,000, far below the current $470,000. That suggests another 15-20% drop in prices here.
5- Real estate agents and mortgage originators will flee the industry faster than teenagers bolt from a keg party when the cops show up. It is my belief that fully 9,000 of the 14,000 licensees in San Diego County won't make a living wage this year; expect most of them to be on to another job next year. The remaining practitioners will be fielding calls and e-mails from disgruntled homeowners like a an airport gate agent in a snowstorm. Learning how to say "No, I'm sorry I can't be of assistance" will be the single best script to learn for next year. Smart practitioners will learn how to properly qualify WILLING buyers and sellers and will profit immensely from it.
6- People will buy homes, they always do. A culture of opportunism will develop among the buying pool and if left untrained, they will drive practitioners insane. The wise REALTOR or originator will assess motivation as much as qualification before accepting a brokerage or financing engagement.
7- Fundamental underwriting guidelines will reign supreme for the next 12-18 months. Think Y2K when you think of lending. If you weren't around back then, ask me for help. FHA financing, being touted as the "catch-all" for the wounded borrowers, will be woefully inadequate to handle this debacle. While FHA offers expanded credit and LTV guidelines, the ability to repay the loan is still required. John and Jane Homeowner just don't make the money to support their debt-load. 100% financing won't go away for those with sufficient credit, reserves, and income. First-time home buyers will emerge as the predominant players in the home buying market. Relationship building, counseling, and firm but encouraging advice will need to be dispensed.
8- More home buyers will go online to start their home search. By reading this article, you are at a decided advantage over your competition...you're here, already. The very nature of the on-line home searcher demands that you do free work before you ever talk to them. Successful practitioners will "convert" these modern day "open house looky-loos" into viable prospective clients by forcing them onto the phone, then to a lender, and ultimately into their office to sign an exclusive buyer brokerage agreement.
The characteristics of the thrivers these next 12-18 months will be superior relationship building, keen intuition about the viability of the prospective client, and decisive closing skills to encourage action. Practitioners will need strong lending partners who can deliver more than rates or programs; the future of the purchase mortgage originators will lay in their ability to help the REALTOR convert the prospect from a name and e-mail address to a executed contract.
It is my greatest wish to have Lenn Harley write a blog post entitled, "Brady's prognostication skills are all washed up" next Halloween but I just don't see it that way.
I lend in 42 states. I've been in the consumer financial services game for 20 years. While I should have been a Jesuit priest or a Naval Academy grad...I'm a mortgage originator. I have a six-year old daughter with a passion to attend Villanova University so I wont be going anywhere soon. If you need a salty sailor to help you ride out the storm, I'm seasoned.
Brian "The Seer" Brady, your prognostications seem well grounded in common sense and experience, and I believe that you will prove to be at least 80% correct next year *sigh*.
As bad as those conditions may be, I do think that those agents and other professionals who are participating on ActiveRain will be better able to weather 2008's housing storm.
Learning how to say "No, I'm sorry I can't be of assistance" will be the single best script to learn for next year.
It's breaking my heart.
You get no argument from me. I wrote much of the same on 11/11, "THERE IS NO PIE IN THE SKY.. . . . . "
I'm not Whorton School but I know my market and I know that, until prices here come down another 20-25%, we will NOT have a viable real estate market.
Fact is, there is a limit how far a home buyer will travel to work. There is a limit that the buyers can borrow based on their income. There is a limit to the buyers willingness to take the risk of buying until they see the bottom of this quagmire.
We're a long way from the bottom. Our sales volume is 1/3 of what it was 2 years ago. Sooner or later, listing agents will have to put their foot down and realize that "list to live" isn't going to pay much if you can't sell the listings.
Damn Brian!!! Why depress me first thing in the morning! Actualy I agree with every thing you have written. 2008 in my market is going to be a rough ride. It's already very difficult but we ain't seen nothing yet. BUT from my perspective I'm looking forward to the opportunity. I am already realigning certain aspects of my business so I can take advantage of the opportunities that a "down market" brings with it.
This too shall pass. It is however going to take at LEAST 18 months or so in my area.
Very good article Brian
All the more reason why we need to be proactive and doing everything we can to be the ones that buyers and sellers come to when they need real estate services. I know of two offices in the region that are closing completely, and several agents who probably won't be working in real estate next year. But the down market has it's opportunities for good strong companies...when offices close, the agents who are strong will relocate to a well-positioned office, like mine, which will grow our market share...
I feel like I need to hang on...as Bryant put it...it's going to be a rough ride. But I can do it. Proper budgeting is key to survival in this market.
I like your formula in item 4-it gives more quantifiable proof as to why prices are stable and still rising here in the Charlotte area. I give thanks every day that we never bubbled or boomed. Doesn't mean that we're not seeing a shakeout in the industry (something else for which i give thanks), but it's not as frightening to buy or sell or work in this industry here.
Love this article, always appreciate your insight. But Villanova? Gotta work on that child. =)
Brian.... you out did yourself on this one. As much as BB mentioned and a few others, this is reality. And I see this going into 2009. But overall, you hit the nail on the head. We all can position ourselves to a certain degree, because it will still be there. But for now, it will be slow. People will buy, but we will be spending more time educating first, selling second. Yes, it's time, which is money. But if you don't put the effort into the online theory now, you won't have a chance down the road. ...for the most part. Overall, you did an excellent job of breaking up certain facets of the market and what will probably take place in the next 12 to 18 months. At least I agree 110% with your assessment.
The buyers who are qualified will be investing in some of the best buys available in many years.
That really is the golden lining, Susan. It's like California, Florida, and Arizona are on sale in aisle #2.
Fantastic post as always, Brian!
Very insightful - I have always encouraged people to read as much as possible. Clearly, you have learned a ton!
Galel
max
www.nycmortgage.us
Hi Brian,
While I would really like to say, you don’t know what you are talking about, I won’t because I, like the others, agree with you. I am told I am being negative when I try to talk to people about what is happening. (except my dad, he’s retired and reads, listens and watches everything)
Would you mind talking about item three a little more? I’m thinking the middle class will eventually be gone or at the very least, will look completely different. What do you think it will look like?
I would like to speak with you in the near future. Maybe be after Thanksgiving?
Actually, Doreen, I'll call you tomorrow; it's already in my planner (I don't use a computerized calendar).
I'll be in AZ after Thanksgiving but before Christmas to meet up with my parents and to see clients.
Item #3- I talk about a class distinction. It's unlike the rhetoric you hear on television or the read in Newsweek
The upper-income middle class is growing exponentially. That segment of the market is also investing in real estate, responsibly, and will set up a generation of their family before they die. I have never seen a better time for an upper-middle income earner to build wealth through real estate than today. Their incomes are growing so thatthey can service more debt The equity in their homes has doubled in the past 5 years.
The 35-50 year old segment of the population has a really good chance to become financially independednt in the next ten years. Let's look at clients of mine in Ahwatukee. They bought a home in 1998 for $280K; that home appraised for $700K 18 months ago. We took out $200K and leveraged that into $1 million of real estate, in Colorado, New Mexico, and Utah. they own six rentals at an average price of $175K. The extra $6000 in debt service is nearly paired off with the rents received. It is my belief that their real estate will be worth some41,8 million in 10 years. They should net $600K at that time. If they can leverage that into $3 million of real estate, I believe they'll eventually retire with some $2,000,000 in twenty years.
That "group" will have ascended to the financially independent, or "wealthy"
The lower-income middle class doesn't have that luxury. They try to buy investment properties, lack liquidity, and fail miserably.
The formerly poor has a chance to become wealthy. never have I seen an opportunity like this. It would be wel if real estate agents learned this skill. They can really help people out and be well compensated for it.
Hi Brian,
I will be in a class tomorrow and with clients over the weekend. How about Monday? At this moment I should be here during the day. Will that work for you?
The task is getting people to come out from under their desks and see that there are indeed tremendous opportunities.
"The formerly poor has a chance to become wealthy. never have I seen an opportunity like this. It would be wel if real estate agents learned this skill. They can really help people out and be well compensated for it."
Our market here in Seattle has not suffered as much in regards to depreciation (although we always lag 9-15 months behind the national economic trends). What have you found that is helpful to assist people in coming out from hiding?
Good post, Brian. Except, how can Milton Friedman be blogging, I'm pretty sure he is dead!
On the more serious side, I think much of what you talk about concerning the American consumer needs to be addressed by honest political leadership. I'm pessimestic that we will get it. The notion that has been espoused for the last 8 years that we can run wars, expand civil government, cut taxes, and do it all by running up foreign ownership of our debt without ultimately paying a price can only have encouraged the consumer debt mistakes. It the guy we are supposed to look up to on the bully-pulpit is an idiot, what kind of example is that.
how can Milton Friedman be blogging, I'm pretty sure he is dead!
He passed away last Thanksgiving. I still read his books and essays voraciously.
Brian, as always, excellent points. Focusing on item 4 and affordability, it's interesting how that didn't seem to matter in recent buying or lending decisions. Very nice and clean, your income times 5 equals the price of house to purchase.
Hi Everyone,
I find all of your comments very interesting and for some reason they put a smile on my face. I'm 24 years old, just graduated from college as an engineer, 5 months into a new job, 3 months away from marriage, and currently searching for a home to buy. I'm the one that was described in this blog. I caught wind a few months ago of the "buyers market" during some small talk with a coworker. I have been throwing those lowball offers around for about a month now and guess what...I hooked one. The Seller was asking 180K (the appraisal value) for the home. I offered 120K, waited them out for a few days, and then they took it along with the closing costs and inspection fees. The land of opportunity...
Wow Brian. I am impressed by your ability to succinctly describe our market. I'm hopefuly you are wrong about next year at least in Arizona; however, if you're not, we'll see the sun again. Of that I am sure. Buyers are finding me online, and I just sold a listing in two days that was priced right!! I'm keeping good thoughts, but keeping myself busy learning and reading and preparing. Thanks for such good writing.
Teri:
I lend and own property in AZ; unfortunately, AZ (and CA) will probably lead the country into this mess; the property values inflated too quickly and got ahead of the incomes. This credit-correction will hit us first.
We'll see sunny skies in Phoenix; the demographics are too compelling to ignore. It just might not be until 2009.