In Equity We Trust...
Greetings all! Happy April 637th! Hope this post finds you well.
We all see bad news every day. I’ve stopped watching the news. Actually, I stopped watching it a long time ago, but of course, as COVID-19 started making headlines, I didn’t want the noise. I am choosing to do what I can by staying home as much as possible; which is a lot. But I am trying to focus my energy on positive things; not negative. Which brings me to my post for today.
If you took a poll of 100 people about what will happen with the Real Estate Market, we would have a pretty equal divide; those that think we are going to be okay or see a small retraction in values, and those that think we will PLUMMET. I’m part of the former; a small correction may be in our midst, but we will get back on track. I’ve pointed out, several times before, that Recession does not equal Housing Crisis. We have shown stats and graphs to prove just that. Don’t remember what they look like? Here’s one:
The problem is we all have a little bit of recency bias; we remember what happened more recently than those that happened before. But in the 2001 Recession, pricing went UP 6.6%… So there’s always that.
I’m not an Ostrich. My head is not in the sand. But there are a lot of people that think things are going to absolutely collapse and crumble. Las Vegas tends to be a high amplitude city; when things are Good, they’re REALLY good here, and when things are bad, they are REALLY bad here. But we also bounce back like a rubber band. Job losses have started to accumulate, and that is not a positive thing; job losses do have a strong correlation to not being able to pay a mortgage. We saw this 12+ years ago, and it took its toll on the local economy. Things, this time, are a bit different. Allow me to explain.
In 2008 most homes have very little equity in them. That is because leading up to the crisis, there were a lot of bad loans; 100% financing with NO documentation; Adjustable Rate Mortgages and even Balloon loans. What are these?
No Documents - exactly what it sounded like. If someone told a lender they were making $15,000 PER MONTH, there was no checking on it. Crazy yes. True, YES! People were borrowing far more than they could ever afford.
Adjustable Rate / Interest Only loans. You’ve heard the term ARM loans. Those are Adjustable Rate loans that would be fixed for a certain time frame, then adjust afterward. So a 5/1 ARM would be fixed for the first 5 years, then adjustable every one year after. The first period of the loan was also INTEREST ONLY - so no payment was being made on principal. If you read my past blog on Interest Rates (here) you know that when Mortgage Rates jump from 4% to 5%, your payment goes dramatically higher. This was happening as people were LOSING jobs!
Balloon Payments - The icing on the cake; a loan type that would be interest only, with a large, lump sum, payment at the end. What happens when balloons pop? Party is over!
But as I said, this time around, things are a bit different. We still have close to 100% loans, but not a lot of them, and you have to prove a stable income to qualify. Now, incomes have gone away for those that have lost jobs, I get that, but overall, these loans are not very large part of the market. In fact, I came across this chart today. More than 50% of all households have at least 50% EQUITY in their homes. Broken down further, 37% of ALL homes are owned FREE AND CLEAR (no mortgage) and 26.7% have at least 50% equity in their home. What is 50% equity? If your home is worth $500,000, and your mortgage balance is only $250,000, you have 50% equity in your property!
That’s a lot of households that have a lot of ‘saved up’ value in their property. I WISH I had a graphic that compared these numbers to what it looked like in 2008, but alas, I do not. However, I do know the numbers were not close to what they are today.
What brought us down, and more importantly, KEPT US DOWN, was the pure number of people that went through foreclosure. It was a constant battle, a battle that we had, and continue to have legislation written to protect parties, and that’s why it dragged on for so long. Are people going to lose their homes? Yes, I believe unfortunately there is no way around that, but it will not be the extent there was last time around. And if you think, for one minute, that there will not be people, dozens of people, looking to buy those properties at auction, you’re wrong.
The real answer is going to be for those that DO need to sell is that they have equity at stake. They are not going to let their homes just ‘go to foreclosure’ or do a short sale. A short sale is when a home is worth LESS than is owed on it. If we have a drop in home values, there will be some that lose equity, but as you can see, more than half the homes owned in the country can survive even a strong downturn.
What we WILL see happen is people that need to pull EQUITY from their home in terms of a sale; and some of these sales will be quick sales, leaving a bit of equity on the table, but to get their hands on cash sooner. When we have markets like this… we may see a lower ride down, but not a dramatic sell off like we see during a huge waive of Short Sales and Foreclosures.
We will see some negative effects on this market for some families. It’s unfortunate. But the market is stronger, and more adept at handling this situation than we were in 2008. That much I know!
-GZ