Bad News Makes Headlines

If you were to believe today’s headlines and the drum beat of hourly news reports on cable TV, America and the entire world economy are in serious trouble. Here’s what the headlines and pundits are saying: Credit markets are in turmoil. The stock market is dropping. Confidence is collapsing. The housing market is down and out. Mortgage markets are so frozen that you can’t get a home loan at any price. Defaults are rising at an alarming rate, and by the time the ball drops in Times Square on New Year’s Eve, it looks like millions will lose their homes and be out on the streets. The drum beat goes on and on.

Putting Things Into Perspective

All this, of course, makes for good TV and headlines. It is high-wire suspense that keeps everyone on the edge of their seats. But, if the truth be told, the sky is not falling, especially, in Houston. So let’s put things into perspective.

Restoring Buyer Confidence

With everything unfolding in the credit markets today, restoring buyer confidence in the housing market is one of our top challenges. Prospective buyers need some reassurance that everything is going to be ok. They need to realize that housing markets, like all markets, inevitably have their ups and downs. But as a long-term investment, homeownership remains one of the best investments for individual households, with a track record that is virtually unmatched by any other purchase in terms of its real benefits.

Look at the facts. Despite the headlines on subprime lending right now, if you have good credit, a job and steady income, you will find there is plenty of mortgage credit to be had at good rates. In fact, there is no “credit crunch” for qualified buyers taking out loans under $417,000 – absolutely none. That’s because loans up to this amount fall within the government-supported part of the mortgage market and are backed by government sponsored enterprises like Fannie Mae and Freddie Mac. For well qualified buyers, rates on such loans are running at about six-and-a-half percent, which is a very good range on a historic basis.

Another thing to keep in mind is that there is quite a bit of inventory out there. For prospective buyers, that means you have a great selection from which to choose and should have no problem finding exactly what you’re looking for.

Finally, there’s no question that it’s a buyer’s market right now, and if you’re looking to purchase a home, you are in the driver’s seat. That means you’re in very good position to negotiate a good deal.

Once again, it’s important to understand that the long-term fundamentals for housing remain positive. Look at anticipated population and household growth; consider the increasing scarcity of available land in metro markets where jobs are located and where people want to live. Over time, these factors will help drive up the value of housing.

One more thing to consider: To make the argument that prices will keep going down, you have to be able to convince me that the cost of building a home is going to go down. I can promise you that won’t happen. Land, material and labor costs will only keep getting higher. And the fact of the matter is that the replacement cost of a home five to 10 years from now is going to be significantly higher than it is today.

The bottom line is this. If you are looking for a place to live and for a solid long-term investment, now is a good time to buy a home.

A home should first and foremost be a place in which to live and raise your family. Too many people in the recent past got carried away with the idea of making a quick buck by purchasing a home or condo and then reselling it right away at a profit. Those days are long gone. And honestly, they should never have happened.

When it comes right down to it, Americans have only two options. They can rent or buy a home. Most people prefer to own the place where they live and bring up their family. And for so many reasons, that still makes a great deal of sense.

The Truth about the Subprime Mess

For a moment, consider the subprime mortgage mess. Let me quote from a noted economist Ben Stein, who wrote a very illuminating and refreshing op-ed column in the New York Times recently. According to Ben Stein, the subprime loans in danger of defaulting constitute a relatively small portion of the entire U.S. mortgage market.

• The value of all outstanding mortgage loans totals about $10.4 trillion. Remember, nearly 40% of all homes are owned debt free without any mortgage.
• Out of the total $10.4 trillion in outstanding loans, only about 13% or $1.35 trillion is considered subprime, and out of that amount only about 14% is delinquent or in foreclosure.
• With about 5% of all subprime loans or about $67 billion actually in foreclosure, only about half of that amount will be lost to investors when the property is resold.
• Stein says that even if even if foreclosures on subprime mortgages doubled to $67 billion, it would be a relatively small loss when compared to the $10.4 trillion mortgage market and the $70 trillion total wealth of U.S. households.

Stein’s point is that the economic spillover from the subprime mess has been grossly overblown. While the subprime mess is a serious problem that never should have happened, Stein points out that once financial markets calm down and regain their senses, everyone will come to the realization that the subprime market can be managed and corrected without bringing down the entire economy.

Fixing Mortgage Markets

To stabilize mortgage and credit markets, the first order of business is to provide liquidity and to restore confidence. The Fed has injected billions of dollars into credit markets and cut the discount rate by a half of a percentage point in an effort to increase liquidity in credit markets. That’s an important first step, but it’s not enough. The National Association of Homebuilders (NAHB) is calling for, and anticipating, another rate cut at or before the next scheduled Federal Reserve meeting in mid September. Also, the NAHB has been urging federal regulators to increase the portfolio caps on Fannie Mae and Freddie Mac – a move that can be taken immediately and would increase liquidity in mortgage markets. Adding more liquidity to the system is certainly the first step in easing that situation and restoring investor confidence.