This is Russ. I just got back from 3 days in beautiful San Diego where I attended the NAR Annual Conference. Robert drew the short stick and had to go to Belize to handle some business. Poor guy.
In case you don’t know, the National Association of Realtors is the world’s largest trade association, boasting well over a million members. Pretty good for an industry that’s been at the epicenter of the “world financial crisis”.
I noticed the AP reported on FHA Commissioner David Stevens’ speech at NAR. They said that Stevens told the Realtors “that concerns the agency is headed for the same financial trouble that snared Fannie Mae, Freddie Mac and the subprime sector are unwarranted.”
I didn’t hear the speech because I was more interested in what people on the front lines were thinking and feeling about the market. Besides, we’d already commented on our observations about FHA in two previous blog posts: Are We Going to Lose our Fannie? and Hey FHA! Your Fannie is Showing. You can find those in the Clues in the News category.
Why should you care about FHA? As quoted in the AP article, Stevens said it best, “Without FHA there would be no (housing) market, and this economy’s recovery would be significantly slower.”
The surest sign there’s trouble is when a bureaucrat comes out and tells your there isn’t (“Pay no attention to that man behind the curtain!” ). Especially when all evidence says there is. It’s even worse, when the “no problem” evidence provided is (again, from the AP article), “the agency has $31 billion in capital – $3.5 billion more than it had a year ago.” But (and it’s a big one), how does that compare to the number of loans insured? The AP article says that FHA has insured nearly a quarter of ALL new home loans made this year.
Consider these recent FHA related reports:
11/10/09 MiamiHerald.com – “FHA moves to boost condo market – The FHA recently announced more lenient, albeit temporary, underwriting guidelines for condo projects”
11/12/09 DSNews.com (reports to the mortgage default servicing industry) – “The FHA told Congress and reporters Thursday that its cash reserve fund had deteriorated to $3.6 billion – the lowest it’s been in the agency’s 75 year history.”
11/13/09 Wall Street Journal – “The FHA’s Bailout Warning – Whoops, there it is. – Critics of Fannie Mae & Freddie Mac were waved off as cranks and assured that the companies would not need a taxpayer bailout right up until the moment that they did.”
11/14/09 AP – “FHA Boss: FHA is not the new subprime” (this is the article written at the NAR conference that I opened up talking about). Hmmmm……I’m having déjà vue all over again…again.
Not to be redundant (okay, maybe a little redundant), but Supply and Demand only work when there is capacity to pay. If 100 people are starving and there’s only 1 Big Mac for sale, one would think that the price would get bid up, right? But that assumes (dangerous word) that those people have the capacity to pay. If they don’t, the price won’t rise.
The lesson? Stevens is right (for now) that FHA money is a BIG part of housing. If it goes away or is tightened, then there will likely be a dip in prices as less people can compete for available properties. Does that mean stay away? Not necessarily.
Eventually, private money (and there’s lots of it!) will make its way back into mortgages. Why? Because it’s profitable and real estate is real and the demand for it is forever. But until the sands stop shifting, private money will stay away. It’s no fun to play a game when the rules keep changing. As long as private lenders think they will have to compete against government (taxpayer) subsidized non-profit lenders, and/or that legislators will impede or negate their rights to recourse under the contract (i.e., stop a foreclosure or force a modification), then private money is going to stay away.
And who can blame them? But, (oops, my opinion is showing), even though all this government tinkering is designed to lessen the pain (ironically caused by government tinkering), it will also prolong it. But I guess private money is coming to the rescue one way or the other, since taxes take private money and funnel it into housing through the government via bailouts. Not my first choice, but that’s the way its working right now.
For joe schmo investors like us, bread and butter properties in highly populated markets with good transportation, education and economic infrastructure still make sense – as long as they cash flow and you’ve got reserves to allow you to own for 10-20 years. Because when private money does come back and is added to all the new money we’ve added through stimulus, it’s very conceivable that prices will go up. But if you have positive cash flow, amortization (pay down of today’s cheap loans over time), and tax breaks, you will still look good in 20 years. And who doesn’t want to look good in 20 years?