Fergetboutit!

So with home sales through the floor, the “American Dream” – a home – having lost most if not all of the “investment” because residential real estate values have fallen below the floor into the basement, you’d think that the government would be doing everything it can to restore the market. Like an $8,000 first time homebuyers federal tax credit? Or having increased the high level loans that Fannie Mae (the effective federal buyer/guarantor of mortgages – the buyer that gives banks comfort) will back to $729,750 (the limit for a “conforming” loan in high cost areas)? That should work, right?

But borrowing is what got us all into this mess in the first place, so we really need to make sure that borrowers buying anything are exceptionally solid. Never again, right?! Banks are turning down buyers right and left, people who would seem to be exceptionally low risks even in this abominable market, to make sure they don’t get stuck with non-performing loans… ever again. Plus, between credit card defaults and new commercial real estate failures, as banks try and “deleverage” (reduce their debt to equity ratios), there isn’t as much money to lend as people – including the government – might believe.

The rules have changed; the pendulum has swung from easy credit to “fergetboutit” rules imposed on borrowers. I mean when you apply for a loan, should you be able to show the full value of stocks and bonds as part of your net worth, right? If you’ve got a job and it looks like you’re gonna keep it, that’s a great sign, right? If your federal tax return shows great in bad times, that is enough, ya think?

Catch-22. OK, let’s look at reality. Terrified banks pretty much won’t lend money in real estate transactions that fall outside of Fannie Mae’s rules. So Fannie Mae seems effectively to have set the regulations for almost all current American residential real estate transactions. And these rules are much tougher than they ever were for obvious reasons.

Fannie Mae requires that lenders allow only 70% of the value of stocks and mutual funds to be included in the applicant’s definition. If you have less than 20% to put down, it’s not happening. If your income rolls up and down (read: self-employed, entrepreneurs, professionals like doctors and lawyers, etc.) – too much risk or variation – prepare for the moment of rejection. Self-employed? Oy! Not happening. If you don’t have enough in the way of past federal income tax returns showing consistent income, well, that’s “bad.” And your credit rating has probably dropped, because the standards have changed.

If you need more than what is an acceptable “conforming loan” for where you live, banks just won’t “go there.” So in areas of the United States where home prices are a lot higher than the national average – coastal urban cities in west, for example – property sales have crawled to about 1/5 of the prior “normal” level of activity. These aren’t the sub-prime borrowers, but that part of the market that most real estate professional feel best about… er… felt. When loans exceed the local Fannie Mae limits, so-called “jumbos” loans have all but disappeared. High end, top-of-the-market “boy are you rich” homes require a whole lot of cash or a loan that simply is based on entirely different relationship between the borrower and the bank.

There are lots of trends that are working against home sales even without these limitations. Even beyond the high unemployment rate and general market uncertainty. For those who were willing to bear horrendous commute times to get a piece of the American Dream – a rapidly-appreciating home – since there is no such appreciation, those properties in the distant urban hinterlands have plunged to levels that suggest that such homes will not be worth even their cost to construct anytime in the foreseeable future. Nobody is buying them.

While the sale of distressed properties tends to dominate the market, traditional market-drivers are notably absent. The July 11^th New York Times: “Lately, the continued deep-freeze in the traditional market has to some extent been veiled by the brisk sale of foreclosed houses. In April, distressed transactions made up nearly half of all existing house and condo sales, the National Association of Realtors said. In May, they were a third. .. That means traditional or so-called move-up sales, where the parties at both ends of the transaction are individuals instead of banks, are limping along at an annual rate of about three million, the lowest figure in a quarter-century.”

Bottom line: In the past, if a home lender made a mistake, rapid appreciation would cover up that error relatively quickly. Without appreciation, that backstop is gone. You have to assume that the house will either stay at the same value, or – hate to say this – depreciate a bit below the sales price. Lending mistakes are only amplified in this environment. But won’t we get back to “real estate as usual” in the near term? The Times: “‘Without further action, we’re not going to stabilize,’ said Steve Murray of Real Trends, a Denver research group. ‘The real estate recovery will take 10 or 12 years.’” Oy!

I’m Peter Dekom, and I approve this message.