If Dr. Lawrence Yun had his way, lending standards would be loosened, down payments would be reasonable, tax credits would incentivize Americans to become homeowners, banks would modify loans liberally and lenders would keep homeowners within a reasonable budget with regard to their home purchases. Unfortunately, banks aren't lending, policymakers are threatening to raise the down payment to 20%, the first time homeowner's tax credit has expired and banks won't talk to homeowners who are current on their mortgage. Does this mean disaster for real estate in 2011?
Last month, I explored these challenges with Dr. Yun, and discovered some real estate hot spots and emerging trends. Dr. Yun believes the recovery has already begun and that "People who hold back and hold back may miss out on the greatest buying opportunity this country has offered in a generation."
(You can listen back to the interview on BlogTalkRadio.com/NataliePace, available streaming 24/7 or as a pod cast.)
Q&A with Dr. Lawrence Yun, the chief economist of the National Association of Realtors.
Natalie Pace: Let's start with the top questions on everyone's mind. When will real estate turn around?
Dr. Lawrence Yun: The good news is that the market is recovering. The bad news is that the recovery is very sluggish. We have to remember that last year, there was a homebuyer tax credit stimulus measure. The market was artificially high at that point. If we can maintain the current pace, this year will actually be slightly better than last year, in terms of home sale activity.
What about prices? How are they holding up this year over last year?
Prices are down about 5%, based on national median price. But remember that all real estate is local. What we have seen is that in areas where there is solid employment, for example North Dakota, Alaska, many parts of Texas and the Washington D.C. area, prices are firming up and rising. But in areas where there is a continuing struggle in the employment, that is where we are seeing continuing weakness in home values.
So, if a lot of new jobs are being created in your neighborhood, that might be a great sign, right?
Absolutely. The job market recovery will be the key driver for everything in the housing sector.
We know that there are a lot of homeowners who are struggling, but what about the buyer? Is now a good time to purchase real estate?
Yes. Mortgage lending rates are at a generational low. Prices have already plunged and people can enter the market at the low point. In everything from prices, to home price to income ratio and home price to rent, all of the metrics are implying that home prices are back to fundamentally justifiable levels.
Over 9 million homes have been foreclosed on, and RealtyTrac is reporting that 3.7 million are waiting in the wings to foreclose. Do you think that the homeowner should have been bailed out instead of the banks?
At that time, the $700 billion TARP money went to the banking system to stabilize the system because of so much inter-dependence. I will not try to second-guess the government officials as to why they chose that. But without a doubt, the reason for the defaults we are seeing - the legacy impact of the bubble years -- is that homeowners are underwater. And anyone who is underwater and then loses their job -- and we had eight million people lose their job in the Great Recession -- that is a bad combination for not being able to make mortgage payments.
Americans were told that we would bail out the banks and then the banks would work to keep Americans in their homes. That doesn't seem to be happening, however.
The banks need to be more reasonable. Banks refuse to talk to people who are current on their payments. They will only talk to people who are defaulting. So this is leading to a very perverse incentive -- forcing responsible homeowners to purposefully default, just so that they can get a return call from the bank to restructure their mortgages. The system still has too many obstacles to modify the loans, and that needs to occur so that we can speed up the recovery.
Note: If you are in need of help in restructuring your loan, go to HopeNow.com, where you can get free help from HUD-approved counselors.
The Feds have kept interest rates low, but the banks aren't lending! Are the standards too tight now? There are people who want to buy, but can't.
Mortgage rates are at generational low levels. But who can tap into these low rates? Data clearly suggests that it is only people with extremely high credit scores. So, Oprah or Bill Gates, if they want to take out a loan, sure, they can get it! We do not want the standards of the Bubble Years, but these stringent standards are holding back the recovery. Homeowners should contact their members of Congress, so that there could be pressure from Congress on the regulators and then from the regulators to the large banks.
What about high down payments? Is there a new guideline that is forcing homeowners to put 20% down?
Some policymakers believe that it was the low down payment situation that led to the crash, and they are trying to raise the down payment percentage to 20%. What happened is a very simple process whereby very large loans were given to people with insufficient income. This is still in the discussion phase. For the current homeowners, there is still a low down payment mortgage product. For example, the FHA (Federal Housing Administration) mortgage has a 3.5% down payment requirement. For veterans, there is no down payment needed.
Can people go directly to FHA.gov to learn more about those loans?
Yes, and they can also inquire about the loans with their local mortgage lender.
Is FHA mostly for low-income people and veterans?
It is available for everyone. Typically first-time buyers are heavy users because there is a mortgage insurance on the FHA loan product. Repeat buyers or existing homeowners typically go for traditional mortgages, which have lower mortgage insurance premiums.
What about the rumor that the home mortgage interest tax deduction might be taken away? Is this political posturing, or do Americans have to worry about this, too?
This is not a real possibility. Every 10 years or so, there are always people who are considered deep thinkers who say, "Maybe we should get rid of this deduction." But it never gains traction and if it did, the President would veto it. Most Americans are homeowners and they rely on this deduction to arrange their finances. This deduction has been around for over 100 years.
Canada doesn't allow the home mortgage interest tax deduction and some of their economists say that was the cause of the U.S. real estate Bubble.
It's not the source of the bubble. The peculiarities of recent times were that lending standards were too loose and anyone with a heartbeat could get a loan. We need to make sure that doesn't happen again.
The price per square foot in other metropolitan cities, like Hong Kong, is mind-boggling. Are we seeing any international buying activity in the U.S.?
Some have children who attend U.S. schools, so they want to buy real estate while they are at the university. Others buy it for a status symbol or for a vacation home. Of course, they think that the price is stabilizing and they are making a good investment. The U.S. is relatively cheap by international, major cosmopolitan city standards.
Some of our more depressed areas are fantastic vacation homes for foreigners, right?
Vacation and retirement destinations for foreigners and for U.S. citizens, as well. Given Baby Boomers, and all of the people who will be going through the retirement process over the next 15 years, I believe that Florida, Vegas and Phoenix markets, and other typical retirement destinations, will do well. Will it take one year, two years or five years for the retirees to reach these markets? That is unknown. But, the number and size of the Baby boomers reaching retirement age is just right over the horizon.
If you are a young family or couple who have been renters, when you factor in the home mortgage interest rate deduction and mortgage rates being so low, the cost to buy could be cheaper than renting, couldn't it?
For the those who are able to obtain a loan, just do a simple calculation comparing what they are paying in rent today, compared to their net out cost if they were to buy. In Washington D.C., the rents are high and are rising. After renters move into homes, they are getting a break!
What are the options for people who do not have a stellar credit rating?
If the individual is willing to stay well within their budget, then they'll have more success. Remember that when your grandparents bought their first home, it was not their dream home. It was their starter home. Over time, they were able to build equity and trade up and trade up and eventually get to that dream home. The American Dream is a long process. It takes hard work and responsibility to steadily move up the scale.
Is now a great time to begin that process?
It's a transitional market. Some people are finding great bargains. As long as consumers remain cautious, they are going to realize 3-5 years from now that they entered the market at a low point and they made the right decision. It's always in hindsight when things become more clear. People who hold back and hold back may miss out on the greatest buying opportunity this country has offered in a generation.
However, don't look at this as a buy and flip situation, right? Next year may not be a rocket ship of real estate returns...
People who are flipping, they are taking a gamble. Investors who are coming into the market now do not have the intention to flip. They buy and rent it out. This easily covers the mortgage payment, so they are automatically getting their equity gains from the rental payments. They are looking at a 10-year horizon to resale. Investors today are not speculators. They are truly looking at that longer time horizon.
Dr. Lawrence Yun is Chief Economist and Senior Vice President of Research at the NATIONAL ASSOCIATION OF REALTORS®. In 2008, USA Today listed him among the top 10 economic forecasters in the country. From 1995 to 1998, while a research associate at the University of Maryland, he was based in the former Soviet Union where he developed economics programs at several universities to help in the transition from communism to a market based economy.
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