Housing Market Bottom: Mortgage Markets and the Speed of the Housing Recovery

The housing decline looks to be showing a bottom, but a better question is how long will it take for a full recovery? Housing, like many industries, is very cyclical. Unlike many industries; however, housing tends to have a rapid decline and a slow recovery. While this has a lot to do with the characteristics of purchasing a home, financing options and price perception play a role as well.

The Mortgage Market and Housing

Collectively the mortgage market has recognized its mistakes and is now going through revitalization. This can be seen in the new legislation and rules that are now in place to obtain a mortgage (minimum credit scores, minimum downpayments, etc.). Stated income and subprime mortgages have gone away (for now), destined to return with even higher interest rates and more regulation.

The momentary closing of the mortgage market did allow consumers to come to their senses as it relates to home prices. When credit was cheap and easy to qualify for, price was not an issue. Simply getting into the market represented access to “endless” capital via refinancing or an eventual sale at an even more outrageous price. The merry-go-round has now stopped, leaving many homeowners out in the cold. For better or worse, the bottom represents the final shake out of those who could not afford homes and those trying to pawn their home off at unreasonable (perhaps even reasonable) prices.

The correlation between the mortgage market and the housing market should not be understated. Regardless of how much interest rates decline, the increased scrutiny on applicants will continue to mute the housing market recovery. This will have an effect on how fast homeowners see a recovery. Prices will remain low with moderate to slow growth in the near future because there is no more free money to be had.

Bottom Feeding on Housing and Mortgages

The hardest part of buying low is simply the access to capital. While banks are very eager to get foreclosed houses off their books, they are not eager to give out unconventional loans. Investors thrive on no money down loans or high interest rate low payment loans because they do their best to minimize cash outflow. With credit markets close investors will have to accept lower returns or pay significantly higher interest rates to obtain creative financing.

Investors should consider bidding for REO bank properties contingent on bank financing. Keep in mind banks will not be willing to trade a foreclosed home for a bad loan. This strategy should garner investors better rates and terms because they are taking a liability off the bank’s books. Financing should be negotiated, but understand that banks have been burned once.