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The Evidence Is Clear: Housing Market Headed Back Downward

JUL 15, 2014 3:04pm ET
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With mounting indicators clearly showing that the so-called housing recovery was just an illusion, and many housing industry pundits who formerly touted the validity of said recovery now recanting their views, there should be no doubt that we are headed for another/further housing downturn.

With over three decades of housing and mortgage servicing experience in a variety of management positions behind me, I have witnessed first-hand several housing cycles in my lifetime. In fact my father was a builder and real estate broker for many, many years. I literally grew up in this business. I am not only a keen observer but also an active participant in this vital industry. With respect to the headline above I offer the following:

  • There remains a "shadow inventory" of properties that have been foreclosed on but have not been released into the marketplace which has helped to artificially drive up home prices.
  • Foreclosure backlogs remain in states that have judicial foreclosure processes.
  • The dramatic influx of institutional investors buying up pools of REO properties to turn them into rentals also contributed to rising home prices (but now these institutional investors are selling off part of their portfolios because their business model was flawed by not taking into consideration of decreasing home values/prices and their vacancy rates are rising).
  • Fewer and fewer first-time buyers are entering the market due to more stringent mortgage lending guidelines.
  • The "affordability" (or lack thereof) has stalled the market and in some areas prices are dropping.
  • Mortgages that were modified under the Treasury Department's HAMP program are beginning to be recast and the ensuing higher interest rates will force more home owners into foreclosure.
  • The proliferation of FHA loans has created a scenario where these low-interest loans have become the "new subprime" loans.
  • The federal government is encouraging Wall Street to again create mortgage-backed securities.
  • Some lenders are lowering their FICO score requirements.
  • The federal government is "encouraging" lenders to make loans to low-income buyers...again.
  • Homeowners are once again using their "equity" as a kind of an ATM once again, as pointed out in The Wall Street Journal article of July 14 by AnnaMaria Andriotis, "More Homeowners Are Tapping Their Home Equity."
  • There has been no effort to create decent-paying jobs in America—Without them, the economy cannot grow and the housing industry will remain stagnant or worse (despite what some "celebrity" economists say, as the housing market goes, so goes the general economy...this is fact, not fiction).

According to an article published in a recent Inman News story, "A majority of North American mortgage bankers fear another real estate bubble is forming," a recent study conducted by FICO found that 56% of Canadian and American respondents who were polled who are directly involved in mortgage lending "expressed concern that an unsustainable real estate bubble is inflating." The article pointed out that the housing market is "bifurcated" because there is strong price growth in many markets pushing "total homeowner equity in the U.S. to its highest level since late 2007, even as 6 million people struggle with underwater loans."

I concur, of course, that this doesn’t feel like a housing market "in recovery." To be sure, there is mounting concern by many lenders about the growing risk associated with residential mortgages.

On top of this you can add the contraction of the U.S. economy in 2Q of nearly 3%, clearly demonstrating the weakness of the American economy. There is a growing majority of people in our country today who believe there is no leadership in Washington on either side of the aisle who are either capable of dealing with economic issues such as the housing market, or they are simply preoccupied with getting reelected.

Because of this dearth of leadership, the gap is continuing to widen between the beleaguered middle class and the top income earners in this country. And more and more of the tax burden is befalling their shoulders to support a growing list of entitlements bestowed on non-producers. Many see this situation as becoming intolerable, much the same as it did in the days leading up to the signing of the Declaration of Independence. This does not bode well for our Nation. That is no illusion.

Lynn Effinger is a veteran of more than three decades in the housing and mortgage servicing industries. He currently serves as executive vice president of ZVN Properties Inc.

Comments (5)
Lynn, thank you for your most informative article. I do agree with some of your comments. However I have noted that relying on indicators is meaningless and I can assure you for every indicator that shows going down there are 10 different indicators showing otherwise. Institutional investors are selling rental packages to smaller investors and that does not change the mix and in fact some of the parcels are placed back in the market for sale for the first time home buyers. The interest rates are at all time low and the fact that the credit scores are being lowered (there are lenders that finance FHA as low as 550 score) created enormous opportunity for first time buyers to get in the game and as result inventory have shrunk. Regardless of the credit as main criteria, the income of the borrower is the pivot point of getting the loan or not. So clearly the demand is here and will be here for quite some time and that also has driven the prices as high as 20% increase in some areas of NYC. I believe most of the shadow inventory has already been released and purchased by institutional investors and through special program for smaller investors. The foreclosure proceedings have shrunk and most of the delayed foreclosure due to faulty papers or robo-signing have been reworked and under new index have been served to the home owners disputing their foreclosure papers. I have been in court houses 6 years ago and there was no room to sit as it was full of the homeowners in default (more than 200 people in the court room on daily basis). Now you hardly ever see more than 20 borrowers meeting with judges and finalizing foreclosures or modifications. The recast you are mentioning will not be till at least 10 to 13 years from now as most modifications shifted the lower rate for 20 years and balloon payment for the added principal balances (what was owed and not paid by the borrower). This recasting is different that rate teaser and option arms that were good for either 5 years or 10 years. The problem that you will see is the balloon payment for second mortgages that borrower paid interest for the first 10 years and then balance amortized over 20 years. Within the next three to four years is when you will notice a massive default on all the second liens as borrowers will be experiencing payment shocks to realize that 10th year of honeymoon is over.
Posted by Bruce B | Wednesday, July 16 2014 at 7:55AM ET
clean case of pump and dump

bob johnson
Posted by allen h | Wednesday, July 16 2014 at 9:24AM ET
The economy can not truly grow without a healthy Housing Market. Therefore, no matter what is wrong with housing, it will eventually be fixed. We have no choice but to do so. Therefore, I would not run for the hills, but actually in the other direction. This is still America and we will prevail!!!!!!!!!!!!!!
Posted by ROBERT R | Wednesday, July 16 2014 at 1:26PM ET
This is probably the most spot on article i've read in 3 years. It's not good and it's not getting better. I firmly believe there will be another bubble and this time, we really will hit the "reset" button. No more prop money and games from D.C.
Posted by brian a | Wednesday, July 16 2014 at 4:19PM ET
If a downturn is in fact imminent, why aren't the secondary players making moves to ward off another crisis? Obviously, these are informed, but nevertheless, opinions. My input concerns making blanket statements about markets without addressing geographical specifics, price range, and other pertinent factors that make prognosticating more science than art. Lastly, we need to take emotion out of the equation and focus on an intellectual level.
Posted by Stephen G | Thursday, July 17 2014 at 3:37PM ET
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