The ‘Gridlock’ Housing Market

These days, the “economy” seems to have replaced “the weather” as the No. 1 topic of small talk. The recession and its impact on virtually everyone and nearly every facet of the economy has certainly dominated discussion around kitchen tables throughout America.

Perhaps no sector of the economy has been affected more in the recession than the housing market. Scotty Ball, a real estate attorney with the Gainesville, Ga.-based law firm Stewart, Melvin & Frost, answers frequently asked questions on the conditions of today’s housing market.

Question: Could you give us a status report of the housing market – both from a local and national perspective?

Scotty: We appear to be in a holding pattern. Under normal circumstances, the Fed’s announcement this month to hold interest rates at near zero for the next two years should have attracted a spurt of new loan activity. But that does not appear to be what’s happening.

With unemployment high and workers concerned about holding onto their jobs, consumers are more concerned right now about paying off their existing loans than adding more debt. Some have theorized that the Fed’s announcement to hold rates down for the next two years may have inadvertently caused prospective borrowers to simply delay any large purchases for the short term.

On the other side, lenders and federal regulators have tightened up credit – raising loan requirements such as the new “20 percent equity standard” for mortgage down payments.

Another example of tighter credit, in June 2011, Fannie Mae – the nation’s largest mortgage buyer, said that borrowers whose existing debt exceeded 45 to 50 percent of their income would be required to have stronger “compensating” factors, such as higher savings.

All of these factors have come together to create an unusual and interesting stalemate. Consumers are not willing to take on more debt, while lenders are not interested in extending more debt in this economy.

Question: Does this “stalemate” extend to other sectors of the economy aside from the housing industry?

Scotty: Yes, this economic stalemate between consumers and lenders appears to be across the board. Recent economic statistics, however, do show that the number of new auto loans was up by 16 percent in the second quarter compared with the previous year, which is an encouraging sign.

Still, the housing market continues to be most directly affected by consumer confidence and the reluctance to borrow.

A lot of homeowners have found themselves owing more than the current value of their homes – the so-called “underwater” mortgage, or “upside down” mortgage. Consequently, these homeowners are unable to sell and move up to a new home – creating yet another drag on the housing market.

New mortgage and refinancing loan volumes fell nearly 19 percent, to $265 billion, at the end of this past second quarter. That’s the lowest it’s been since 2008, according to Inside Mortgage Finance, a national industry newsletter.

Applications for new mortgages are at a 10-year low, according to the Mortgage Bankers Association.

Question: Do you see any positive signs in the housing market?

Scotty: Definitely, I see many encouraging signs of recovery – especially in our local market of Gainesville-Hall County and Northeast Georgia. Our community was recently named by Bloomberg Business Week as one of the Top 25 Fun Affordable Places to Live in the United States.

The rate of home foreclosures appears to finally be slowing down a bit. At the same time, we have seen a number of new homes being built in the $150,000 to $170,000 price range like Mundy Mill and Sterling on Lanier in South Hall, Cresswind on Lanier, and The Gardens in Gainesville. The local inventory of homes in this price range is tightening up, and the local market appears to be responding with new construction.

The number of new building permits is up significantly over last year in our community. In Gainesville, for example, there was just one residential new-construction permit last year versus over 40 permits so far for 2011.

Another positive sign that is often overlooked is that while Americans may be spending less, they are working harder to pay down their debt.

In August 2008, household debt peaked at $12.41 trillion. Since then, it has declined by about $1.2 trillion, according to Moody’s Analytics of data from the Federal Reserve and Equifax, although it has to be pointed out that a significant portion of this debt was simply written off by lenders due to loan defaults.

Also, the proportion of after-tax income that households spend to remain current on loan repayments has fallen – from close to 14 percent in early 2007 down to 11.5 percent presently, according to Moody’s Analytics. This is another positive sign that households are slowly improving their financial condition.

Question: These are indeed positive signs possibly pointing toward a recovery, albeit a slow one. In your opinion, what is it going to take to get consumers buying homes and spending again?

Scotty: Consumer confidence has been severely shaken during this economy, and it needs to be restored for this market to return to normal again. This is perhaps our biggest need right now.

In my opinion, the best solution to restoring confidence is that we begin to see more jobs created and unemployment rates start falling. The national elections in 2012 are another factor that could impact the mood of consumers and their confidence level.

Also remember that we are still in a historically low interest rate environment – and this will continue to provide opportunities for business and consumers on the road toward recovery.

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