Real Estate Woes Worsen…But Why?

InvestorDirector.com

The homebuyer tax credit may have expired, but there’s still a larger issue

The National Association of Realtors recently reported that the seasonally adjusted index of executed sales agreements for existing homes dropped 30 percent this past May, as compared to April. May’s reading was the lowest dating back to 2001, and was also down 15.9 percent from the same month just a year earlier in 2009. This index provides an early measurement of sales activity because there is usually a one-to-two month lag between a home buyer’s signing of a sales contract and a completed transaction. Just as alarming was that sales of new homes in May fell to an all-time low since numbers were first recorded in 1963.

Federal tax credits for home buyers helped to boost home sales for over a year. First-time home buyers could get a credit of 10 percent of the purchase price of a home up to $8,000, while existing homeowners who bought could get 10 percent up to $6,500. The end of the tax credits on April 30th, 2010 have definitely contributed to May’s sales agreement index drop. Unfortunately, the home buyer tax credits were only a small band-aid covering a much larger wound that needs attention: Banks still aren’t budging on overly tight mortgage qualification guidelines.

Some erroneously say “demand” for real estate is low

Many industry experts are wondering whether or not the upsurge in home buying that we saw during the past year as a result of the home buyer tax credit will continue. So far, the numbers don’t look promising. The concern is that now that the tax credit has expired, where will the demand come from? The answer to that question is that the demand is already there; would-be home buyers are facing lending guidelines that are far too strict. Do you remember what banks were told when they received Troubled Asset Relief Program (TARP) money in the fall of 2008? They were told to start lending money, especially in the real estate sector. But what did they really do? Instead of lending money to spur economic recovery, banks were caught (using our tax dollars) investing in government bonds and buying smaller banks already in possession of their own foreclosed home inventory to eventually sell for profit later on.

A review of investor presentations and conference calls by executives of some two dozen US-based banks by the New York Times shortly after the TARP bailout found that “…few [banks] cited lending as a priority. Further, an overwhelming majority saw the (TARP) program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.”  If you remember, bank loan guidelines to would-be homeowners actually got much tougher after the TARP Bill was passed in 2008, despite the pressure placed on banks to create new home loans. People want to buy homes to live in and to invest in, but if they cannot receive financing that demand cannot be harnessed; it’s just sitting there. Real estate agents, appraisers, and mortgage professionals represent only a fraction of the lineage of people who are struggling to get deals to the closing table as banks wait to create reasonable credit guidelines for would be homeowners and investors.

What good are brief home buyer tax incentives, when roughly 4.5 million people will lose their homes to foreclosure this year as millions more will have damaged credit from a past foreclosure, preventing them from making a future home purchase? Nearly all of these loans could be modified, creating an exodus of jobs. And what about the people that have lost jobs and are living with parents or roommates on a nonexistent or diminished income? This too is attached to stingy bank lending standards as credit for small businesses has dried up, causing mass lay offs. Let’s not forget about all of the people that would come out to buy a home but instead are too scared after seeing the real estate market inflate and then explode like a fat kid with diarrhea. It’s not a lack demand and it’s not the disappearance of the tax credit (although that did help for a while); let’s face the fact that the banks are in control of the real estate market while real estate professionals, would be homeowners and investors work tirelessly to close deals in a monopolized system.