Earlier this week Pamela Hale from the Press-Telegram sent an email asking my views and opinions on the current economic situation in America for an article they were running. My schedule precluded me from answering in time to make their deadline for the article that ran on Wednesday. With answers already written I did not want them to go to waste so I share them here. I have edited a little since Wednesday but essentially the same as asked and answered.
I prefaced my responses by informing Hale I am not an investment advisor or counselor but a mortgage broker so my answers are framed in that context.
1. Are you dealing with clients who are stressing about the economy? If so, what are you advising them to do during this time?
Since my clients are purchasing new homes I would say they are not “stressing about the economy” but rather are looking to take advantage of what this current economy is able to offer them: low housing prices and low interest rates. Many young families and individuals are converting from being renters to first time buyers as the affordability of local housing is at the most affordable point it has been in years. I have had several clients in the past several months who indicated they thought they would have to wait several more years to purchase their first home and because of the current economic environment are able to do so now. My advice to them is to absolutely purchase their new home while they can, no one knows for certain what will occur in our markets in the coming months/year particularly in what mortgage products may be available to them. In regards to those purchasing with the higher loan amounts they face a deadline of December 31, 2008 before the conforming and FHA loan limits in our area are rolled back from $729,750 to $625,500.
ASIDE OUTSIDE OF QUESTION: The increase in the conforming and FHA loan limits earlier this year saved our local real estate market. Prior to the increase conforming loans were capped at $417,000 and FHA at $362,790 and the jumbo mortgage market was non-existent. With the increase of loan limits buyers, particularly first time buyers, were able to enter the market and purchase homes and condos—saving the banks a lot of money on foreclosure and short pay write downs, allowing sellers with any equity to sell and allowing buyers to purchase with traditional FHA mortgages with 3% down or conventional with 5% down (since undergoing change with mortgage insurance companies pulling back on insuring 95% loans in California). I urge all Californians to contact their Congressional Representatives and Senators Boxer and Feinstein to put the loan limits back to the current $729,750 for single family residences—it is very much needed to allow the housing recovery that is underway to continue.
2. What are some of the most frequently asked questions from clients?
Are prices going to continue to drop? Are rates going to get lower? Is now a good time to buy a home? My answers are that if you can afford to purchase real estate in Coastal California you should, only a few are going to perfectly hit the bottom of the market—and not intentionally. We do not know when a bottom has hit in prices until several months after it occurred. And given the history of local real estate, when prices start to go up they usually move pretty quick. Same is true of interest rates, although with the injection of $700 billion into the economy the new recovery plan from Washington D.C. will cause inflationary pressures which puts pressure on interest rates to go up.
3. Do you suggest people buy/sell or make any such investments at this time?
As I mentioned I do not counsel on investments in stocks and bonds and other assets that require licensing from the SEC, but in regards to real estate there are some very good values on the market today in many local areas that smart investors can purchase and hold on to for rental income and long term appreciation. We are seeing individuals who foresaw the market decline and put cash into savings now starting to invest that cash in local real estate for investment purposes.
4. Where do you see the economy going in the next 5 years?
I have an economics degree from Pitzer College in Claremont and have studied the economy for over twenty years so one thing I know about predicting the economy is that it is easier to be wrong than right. That said, I am an optimist and feel we are in the greatest country on earth with the greatest economic foundation comprised of ingenious and entrepreneurial men and women, solid companies providing quality products and services and the freedom to pursue excellence and success. Because of this I feel our economy will follow the historical cycles of coming out of downturns stronger than it was when it went in. My major concern moving forward and economic recovery and success however is not market forces but rather political forces. Higher taxes from Washington and/or Sacramento will hurt any recovery and either delay such a recovery and/or push the economy further down before it can begin to recover. Economic growth requires investment. Investment comes from assets, or capital, accumulated beyond the operating expenses of a business or individual. Taxes pull money out of asset accumulation and instead transfer funds to the government where the funds are not spent efficiently or productively. I fear an Obama administration with a significant majority in both Houses of Congress for the Democrats will lead to higher taxes and dampen, or drown, any economic investment and recovery for quite a while. The refrain of “tax the rich” rings hollow with me as I have seen the actual tax revenue collected after the Bush tax cuts in his first term; tax revenues increased substantially and the overwhelming majority of the increase tax revenue came from the “rich” Obama has said he will tax. Who invests the most in our economy? Who risks capital to open new businesses, purchase new machines or hire more workers? Not the poor and seldom the middle class, it is generally the wealthiest Americans who invest the most in our economy and allow the funds to generate economic activity. Many small and medium businesses are in the “rich” target range for Obama tax increases, these are typically family run businesses that provide solid employment and economic stability in communities like Long Beach. Structuring a tax plan that penalizes capital invest and growth will greatly hurt these companies, our economy and any potential growth. So given the current economic conditions and tax codes I see our economy in five years being much healthier and robust than it is today and back on the cycle it was on from 2002 through 2007 when we saw a record number of quarters experiencing economic growth. Change the tax codes and we will see a prolonged recession and delayed recovery.
5. What are some things the powers-that-be should do to help the economy, prevent this from happening again?
I am not one for a lot of government interference, but if the government is going to interfere it needs to be transparent and active. I am amazed that through the past week the Congressional leadership with responsibility for oversight of Fannie Mae and Freddie Mac have been allowed to keep their positions as committee chairs and senior members of the committees involved. Further, I feel that any GSE (government sponsored entity) and its senior leadership should not be allowed to make political contributions to parties or candidates or elected officials. Fannie and Freddie and their CEOs have made millions of dollars of contributions to elected officials who were responsible for overseeing their operations and as a result they, the CEOs, made hundreds of millions of dollars. Further, I do not feel the government, federal, state or local, should bend the rules of mathematics and credit qualification to allow people who cannot afford to be homeowners to purchase homes. The Community Reinvestment Act to encourage homeownership in low to moderate income areas was poorly conceived and poorly implemented and allow thousands and thousands of families to purchase homes for which they were not qualified and for which the lenders, brokers and GSEs made millions of dollars. As a mortgage broker, if I were to fund a loan in certain census tracts in Long Beach with a Fannie Mae or Freddie Mac mortgage lenders would offer a premium for the mortgage—we transferred most of the premium to buyers in the form of lower rates, but many brokers kept the additional funds. CRA mortgage credits and premiums were offered regardless of income, whether the property was owner occupied or investment and were based on location in census tracts where the average income for the tract was below the County median. So ridiculous was this “incentive” to enable homeownership to low to moderate income earners that large parts of Palm Springs were in CRA census tracts and eligible for the credit because of the number of retired people reporting little income on their taxes but worth tens of millions of dollars. So the powers that be need to step back on trying to require the private sector to provide any type of additional incentives to people to buy homes they would not otherwise afford; let the market take care of prices, qualifying and guidelines. Qualified people purchasing homes they can afford tend to make their payments; unqualified people purchasing homes they cannot afford tend to make foreclosures.
6. What can the average citizen investor do?
I am an “average investor” and I am not doing anything. I still have 401(k) contributions pulled out of my pay check, I was contributing when the market went up and now I am contributing when the markets drop, over time it averages out. For investments I already have I am letting them stay put and watching the markets go up one day and down the next. The daily swings are incredibly volatile and there is a downward trend, but ignore the daily activity, watch your portfolio on a quarterly basis and consult a professional to ensure you are in solid companies that historically have a solid P&L and balance sheet; they may not be the sexiest investments that show huge gains, but over time the are in business and consistently have market share and profits. Since Wednesday the stock markets have dropped even further, any selling now may prevent future losses, but also may take investors out of any rebounds. Unless you sold a year ago you missed the peak, so now is the time to consult a professional as to opportunities for you and your family.
Conclusion
I am involved in the most important asset anyone will own: their home. The past several years me, and others in our company and industry, have turned down many, many potential clients that would have made a commission for us had we put them into loans they could not afford. We told them they could not afford to purchase the home they were seeking and would give them steps to take to be able to become homeowners. Some of them followed the advice and today are homeowners with solid mortgages and are making their payments. Sadly many of them found another lender or broker who was more than happy to get them a mortgage, or quoted a lower rate or somehow sold them on what they wanted to be sold on. For those who ignored the lowest price, the “best deal” or any loan that would allow them to own a home, for those people they are still homeowners. For those who chased the “best deal” and allowed themselves to be lied to or talked into a bad mortgage situation, or who knowingly took on a mortgage they could not afford, for those people they are either already out of their home or will be in the near future as they simply cannot make the mortgage payments. I have been in the business for twenty years and am amazed at how consumers will shop for “the best deal” when it comes to the most important asset they will own. Potential homeowners will spend more time shopping for the best rate or price and open themselves up to being deceived for a home loan but will not hesitate to buy the latest iPod or notebook computer or Blackberry. When buying a home the two most important things a person should do is get a very good and reputable real estate agent and a very good and reputable mortgage consultant. What seems like a good deal today often becomes a bad deal tomorrow. Think long term, think stability and think about the fact you are buying a home. If a deal sounds too good to be true it probably is, and that good deal could have you losing your house when you learn how bad of deal it really was. A fair deal with an honest broker will provide a stable and enjoyable homeownership experience, look for that relationship.
For more of my thoughts on the local and national mortgage and credit markets check out my mortgage blog every Friday afternoon for new updates.
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