Debt-Limit Crisis May Affect Housing Through Customer Confidence

The debt-limit crisis debate and the seemingly irresolvable political party differences about how many trillions of dollars are needed to resolve the country’s economic problems—along with President Obama and House Speaker John Boehner’s pleads for support on national television—concern mortgage professionals in a specific way.

The single issue that concerns Steve Ozonian, chief RE officer, Carrington Holding Co., about the debt ceiling is “consumer confidence particularly in real estate, spending money and making investments in things that now are not as trusted as they once were, i.e., single-family assets.”

Failure to reach a plausible agreement on deadline would have consequences. Even a political common ground and an agreement are bound to keep economic insecurity high. In a worst-case scenario the debt limit crisis can cause the withdrawal of international investors, inflation, further housing price devaluations, or higher interest rates that altogether would prolong the housing market recovery. A smaller budget could easily translate into housing program assistance cuts.

“The more bad news and the more uncertainty about where this country stands just feeds off of the problem we already have which is people are very concerned,” he said.

In Ozonian’s view one example is the fact that the number of people “roaming around the Internet looking for real estate” is high, if only one were to look at the real estate portals and their daily viewers. “The traffic numbers really haven’t gone down a whole lot compared to where they were a year ago or even two years ago.” It indicates potential buyers are interested in real estate. “They are just afraid to jump in.”

Apparently such buyers are carefully weighing their options and determining their long-term and short-term goals when it comes to homeownership. It may be a buyer’s market, but unless a buyer is planning 20 years to 30 years ahead, they opt to stay in the sidelines.

Debt ceiling challenges may be complex issues not easy to decipher, but they are clearly affecting consumer confidence and in many ways. Primarily, Ronald Jasgur, president of Woodward Asset Capital, says the housing market is suffering from the discrepancy between population growth and job growth in distressed markets were “too many people are underemployed.” Housing is not affordable for those living paycheck-to-paycheck opening the home purchase market to investors who are “snapping up whatever they can.” Only employment can bring owner-occupant buyers in the marketplace.

Employment allowed thousands and thousands of first-time buyers to come into the market when interest rates were much higher than today, but the overall housing market was growing.

Rates can move up, but that will not dissuade somebody from buying a house, Jasgur says. “What’s going to dissuade someone from buying a house is not knowing if their job is secure and not knowing whether or not there’s a chance for appreciation.”

To James Zeldin of Default Resource programs such as Fannie Mae’s first loan program that gives the homeowners the first opportunity to buy Fannie assets before investors even have the ability to submit an offer can further promote homeownership despite the crisis.

Borrowers are dissuaded by the prospect of “going head-to-head against an investor who may have lower cost of capital,” or can offer an all-cash deal. He sees the GSE’s effort to force down to the servicers and their various asset management partners into a direct interaction with the homeowner, versus the investor, as a way “to further enhance the overall opportunity to improve the real estate market.”

It also is a matter of generational differences, says Jay Loeb, vice president and a principal owner, National Creditors Connection, Inc., Lake Forest, Calif. “To Ron’s point, too…If you talk to the younger generation, homeownership isn’t all what’s it cracked up to be to them. They don’t have the desire that we had at 25 even 30 years old.”

Other options are living with parents, even if they are very well off and doing well enough to purchase a house. Today, he said, “they see the mess” and a very large part of the young generation are not interested, not even in the first-time buyer incentives.

“There’s no question” the first-time homebuyer’s cash credit did help, Collier says, especially in states like California that offered state credits at the same time federal credits were available.

He recalled how a 25-year-old borrower benefited from both the federal and state credits, negotiated down the property price on an FHA loan with 3% down and a 4.75% interest rate.

Collier told him: “You won’t see this again in 100 years. Do it.” Yet the buyer “had some trepidation” as he made his final decision. “He was worried about the price, that maybe it wasn’t at the bottom of the market.”

He reminded to the buyer that “all it takes” to wipe out any potential savings due to a price that may have reached the bottom “is a little tick up in interest rates” and the end of the tax credit.

Collier finds the growth of the rental market has not helped persuade the younger generation, or Generation X, Y and Z, to own. He argues that when they compare a $2,000 monthly rent with a $350,000 home they get more square footage, less headaches, less worry.

“They’re very, very fearful that they’re going to buy an asset that is almost like an old car, you drive it off the lot and it depreciates 20%,” he said. “A lot of folks are really nervous to invest their hard-earned cash, especially at a young age into something that’s so volatile.”

Jasgur also expects these customer confidence concerns will prevail in the longer term. It is an issue, and the underwriting standards, he added, “Sorry. Underwriting standards aren’t helping at this point.”