Real Estate Crisis or Credit Crisis?

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Sell your house fast!

I wrote a few days ago about the astounding number of mortgage applications that are being turned down.  Statistics show that people with good credit and money down are still being denied mortgages because of current tight lending practices.  That got me thinking.

Do we have a real estate problem?  Or a credit problem?

Of course, I look at this from the standpoint of an investor.  We investors have always paid slightly higher mortgage rates than owner occupants, and have had to put more money down.  We can live with that.  But there are a couple of other things going on in the mortgage market today that make it difficult for investors to buy.

  • Investors are limited to 4 investment loans.
  • Investors have to carry six month rental reserves for each rental they own.

So once an investor has 4 rentals, the conventional mortgage market says “No More”.  And on those first 4 loans, the banks want the investor to show bank statements proving that they have cash sitting around, equal to 6 months worth of payments, taxes, and insurance.  As if any investor worth his or her salt would be vacant for six months on everything they owned!

What makes houses sell?  CREDIT!

Think about this.  If credit were easily available, the current inventory of houses would “fly off the shelves”. If regular people with regular jobs, good credit, and a reasonable down payment could get a mortgage approved, they would buy a house.  They all know that rates and prices are a bargain today!  And if investors could could get 30 year fixed rate loans at a point above owner occupied rates, 10% down, no reserve requirements, and no limits to how many they could buy, they would buy like crazy.  Housing glut over.  And no, I’m not talking about the “if you can fog a mirror” type lending that got us in to the foreclosure mess.  I am talking full-doc loans, just with reasonable underwriting requirements.

Cash house buyers set the market.

The lack of reasonable credit availability means that the investors that are active in the market today are mainly cash buyers.  In a recent month, over HALF of the house sales in Miami were cash!  Cash buyers are very price sensitive, sending the price trend down.  This feeds a vicious cycle, where appraisers only have discounted cash sales to use when setting values for “normal”, non-distressed transactions…so the appraisals come in low, pushing values down even more.

It’s the classic supply and demand story.  When dollars become scarce due to tight lending (meaning fewer people can buy), more sellers compete for those dollars by discounting their prices, sending the whole market south.  If more credit were available, more people would be able to buy, inventories would drop, and prices would stabilize.

Fannie and Freddie, are you listening???

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