Jason and the Argonauts
Those of us of a certain age loved that 1963 film based on the Greek myth of Jason, who searches for the Golden Fleece. Along with his mighty crew (including Hercules), he overcomes many challenges and demons to accomplish his goal. I grant that it's a bit of a stretch, but those in the real estate industry find themselves on such a journey, with new challenges to a recovery presenting themselves daily.
The Challenge du Jour
Last week interest rates ticked above five percent for the first time since last spring. One of the endearing rationalizations for continuing to buy real estate in a market with a bottomless bottom is that interest rates have been remarkably low for a very long time. So now the jitters begin that the low-interest-rate party is over and one of the good reasons to buy into this market is going away. At a minimum the refinancing market is about to get whacked. True Story: My client has a 4.5% interest rate and was refinancing into a four percent rate. For various reasons, his rate lock expired, and, as you might expect, despite begging and pleading, the bank would not extend the interest rate. About a week later, he was able to lock in to a 4 1/8% interest rate and the "refi" still made sense. Had the new rate increased to 4.25%, my client would have passed on the refi and stuck with his original rate (still a very good one). So extrapolate that nationwide to thousands of borrowers who are already in the four percent rate range, and basically if rates stay above five percent, the refi market will shut down.
And Then There's the End of Fannie and Freddie
Many would argue, rightfully so, that there would not be a viable real estate industry without the government-run Fannie Mae and Freddie Mac entities. By purchasing most of the home loans that are consummated today and by securitizing those loans in the secondary mortgage market, these agencies have kept residential real estate on life support over the past two years. Although it may not be the right time to pull the plug on this mortgage safety net, by all accounts the writing is on the wall, and significant and painful changes will be made to these programs over the next ten years.
The Thirty-Year Fixed as the Golden Fleece
Let's face it: home ownership, particularly for first-time buyers, would not be possible without the 30-year fixed-rate loan. Without question, this loan program is the bedrock of the home loan financing industry and has made home ownership possible for many on their Jason-like journey for a piece of what's left of the "American Dream." However, some see the 30-year fixed-rate loan as a fleece of another kind. For the naysayers, it was a major contributor to the housing bubble, allowing folks to purchase homes who would not otherwise qualify if a 30-year product was not available. But the 30-year fixed has become a part of the fabric of the country that has made a better life possible for many. And when you start tearing at the national fabric, proceed with caution, as there will always be unintended consequences. So now the Administration and the Congress, pulling on that fabric in many different directions, will try to figure out what to do with this massive mortgage bureaucracy. Politics aside, few in the residential real estate business would disagree that this government-created creature is the real estate economy's lifeline and is keeping the mortgage industry alive.
Residential Reality: The Journey Continues...
The one-two punch of higher interest rates and the inevitability of changes coming to Fannie and Freddie only further slow the process of the elusive real estate recovery. For those of us on the ground, getting deals done seems to get more difficult every day. But there are much bigger challenges at stake. As the policymakers poke and prod the creature and try to manage the government's role in the residential real estate market, who gets to own a home appears to be on the table.